Exhibit (99.3)
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, 2001 and 2000, and the related consolidated statements of income,
shareholders' investment and cash flows for each of the three years in the
period ended December 31, 2001. 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 auditing standards generally
accepted in the United States. 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, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 29, 2002
1
REGAL-BELOIT CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Information)
ASSETS
December 31,
Current Assets: 2001 2000
---- ----
Cash and cash equivalents .............................. $ 6,629 $ 2,612
Receivables, less allowance for doubtful accounts
of $2,233 in 2001 and $2,031 in 2000 .............. 80,595 97,032
Income tax receivable .................................. 182 4,069
Future income tax benefits ............................. 8,420 9,475
Inventories ............................................ 132,272 148,741
Prepaid expenses ....................................... 3,401 3,709
--------- ---------
Total Current Assets .............................. 231,499 265,638
Property, Plant and Equipment:
Land and improvements .................................. 11,867 11,898
Buildings and improvements ............................. 85,170 84,171
Machinery and equipment ................................ 240,444 225,617
--------- ---------
Property, Plant and Equipment, at cost ............ 337,481 321,686
Less-accumulated depreciation .......................... (152,608) (132,608)
--------- ---------
Net Property, Plant and Equipment ................. 184,873 189,078
Goodwill ..................................................... 312,735 316,295
Other noncurrent assets ...................................... 17,492 21,396
--------- ---------
Total Assets ...................................... $ 746,599 $ 792,407
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable ....................................... $ 28,429 $ 32,298
Dividends payable ...................................... 2,505 2,509
Accrued compensation and employee benefits ............. 20,250 21,941
Other accrued expenses ................................. 17,303 22,849
Federal and state income taxes ......................... 1,848 154
Current maturities of long-term debt ................... 120 106
--------- ---------
Total Current Liabilities ......................... 70,455 79,857
Long-term debt ............................................... 345,667 393,510
Deferred income taxes ........................................ 43,022 41,063
Other noncurrent liabilities ................................. 5,304 4,088
Minority interest in consolidated subsidiary ................. 2,001 --
Shareholders' Investment:
Commonstock, $.01 par value, 50,000,000
shares authorized, 20,877,249 issued
and outstanding in 2001 and 20,912,192 issued
and outstanding in 2000 ........................ 210 210
Additional paid-in capital ............................. 41,967 41,779
Less-treasury stock, at cost, 159,900 shares in 2001
and 99,200 shares in 2000 ...................... (2,727) (1,685)
Retained Earnings ...................................... 244,564 234,992
Accumulated other comprehensive loss ................... (3,864) (1,407)
--------- ---------
Total Shareholders' Investment .................... 280,150 273,889
--------- ---------
Total Liabilities and Shareholders' Investment .... $ 746,599 $ 792,407
========= =========
See accompanying Notes to Consolidated Financial Statements.
2
REGAL-BELOIT CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars, Except Shares Outstanding and Per Share Data)
For the Year Ended December 31,
-------------------------------
2001 2000 1999
---- ---- ----
Net Sales ........................................ $ 663,571 $ 598,203 $ 550,661
Cost of Sales .................................... 497,694 440,774 406,493
----------- ----------- -----------
Gross Profit ............................... 165,877 157,429 144,168
Operating Expenses ............................... 109,817 85,821 71,728
----------- ----------- -----------
Income From Operations ..................... 56,060 71,608 72,440
Interest Expense ................................. 22,239 15,332 9,406
Interest Income .................................. 221 274 220
----------- ----------- -----------
Income Before Income Taxes ................. 34,042 56,550 63,254
Provision for Income Taxes ....................... 14,452 22,779 25,187
----------- ----------- -----------
Net Income ................................. $ 19,590 $ 33,771 $ 38,067
=========== =========== ===========
Earnings Per Share ............................... $ .94 $ 1.61 $ 1.82
=========== =========== ===========
Earnings Per Share - Assuming Dilution ........... $ .93 $ 1.61 $ 1.80
=========== =========== ===========
Average Number of Shares Outstanding ............. 20,868,896 20,984,423 20,959,182
=========== =========== ===========
Average Number of Shares - Assuming Dilution ..... 21,124,204 20,996,189 21,169,580
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
3
REGAL-BELOIT CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(In Thousands of Dollars, Except Per Share Data)
Accumulated
Common Additional Other
Comprehensive Stock $.01 Paid-In Treasury Retained Comprehensive
Income Par Value Capital Stock Earnings Income (Loss) Total
------ --------- ------- ----- -------- ------------- -----
Balance, December 31, 1998........ $209 $40,860 -- $183,285 $143 $224,497
Net Income........................ $38,067 -- -- -- 38,067 -- 38,067
Dividends Declared ($.48 per
share)........................... -- -- -- (10,065) -- (10,065)
Translation Adjustments........... (599) -- -- -- -- (599) (599)
-------
Comprehensive Income.............. $37,468
=======
Stock Options Exercised........... 1 725 -- -- -- 726
----- ------ ------ -------- ------- --------
Balance, December 31, 1999........ 210 41,585 -- 211,287 (456) 252,626
Net Income........................ $33,771 -- -- -- 33,771 -- 33,771
Dividends Declared ($.48 per share) -- -- -- (10,066) -- (10,066)
Translation Adjustments........... (951) -- -- -- -- (951) (951)
-------
Comprehensive Income.............. $32,820
=======
Common Stock Repurchased ......... -- -- (1,685) -- -- (1,685)
Stock Options Exercised........... -- 194 -- -- -- 194
----- ------ ------ -------- ------- --------
Balance, December 31, 2000........ 210 41,779 (1,685) 234,992 (1,407) 273,889
Net Income........................ $19,590 -- -- -- 19,590 -- 19,590
Dividends Declared ($.48 per share) -- -- -- (10,018) -- (10,018)
Translation Adjustments........... (928) -- -- -- -- (928) (928)
Additional Pension Liability...... (1,529) -- -- -- -- (1,529) (1,529)
-------
Comprehensive Income.............. $17,133 -- -- -- -- -- --
=======
Common Stock Repurchased ......... -- -- (1,042) -- -- (1,042)
Stock Options Exercised........... -- 188 -- -- -- 188
----- ------- ------- -------- ------- --------
Balance, December 31, 2001........ $210 $41,967 $(2,727) $244,564 $(3,864) $280,150
===== ======= ======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
4
REGAL-BELOIT CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars Except Share Information)
For the Year Ended December 31,
-------------------------------
2001 2000 1999
---- ---- ----
Cash Flows From Operating Activities:
Net Income ................................................... $ 19,590 $ 33,771 $ 38,067
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation and amortization .......................... 31,798 25,549 23,052
Provision for deferred income taxes .................... 3,014 7,678 1,652
Change in assets and liabilities, net of acquisitions:
Receivables ....................................... 16,673 8,321 1,093
Inventories ....................................... 17,014 (5,686) 7,066
Income tax receivable ............................. 3,887 (4,069) --
Current liabilities and other, net ................ (10,207) (13,475) (673)
--------- --------- ---------
Net cash provided from operating activities ....... 81,769 52,089 70,257
Cash Flows From Investing Activities:
Additions to property, plant and equipment ............. (15,426) (16,994) (11,422)
Business acquisitions .................................. (3,629) (269,232) (32,083)
Sale of property, plant and equipment .................. 650 2,725 49
Other, net ............................................. 159 (1,519) (1,216)
--------- --------- ---------
Net cash (used in) investing activities ................ (18,246) (285,020) (44,672)
Cash Flows From Financing Activities:
Additions to long-term debt ............................ 2,000 270,000 1,000
Repayment of long-term debt ............................ (50,598) (24,598) (19,047)
Repurchase of common stock ............................. (1,042) (1,685) --
Stock issued under option plans ........................ 188 194 726
Dividends paid to shareholders ......................... (10,022) (10,075) (10,057)
--------- --------- ---------
Net cash (used in) provided from financing activities... (59,474) 233,836 (27,378)
EFFECT OF EXCHANGE RATE ON CASH .............................. (32) (22) (26)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ............................................ 4,017 883 (1,819)
Cash and cash equivalents at beginning of year ......... 2,612 1,729 3,548
--------- --------- ---------
Cash and cash equivalents at end of year ............... $ 6,629 $ 2,612 $ 1,729
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest .......................................... $ 22,607 $ 14,924 $ 9,520
Income Taxes ...................................... $ 7,265 $ 18,348 $ 24,886
See accompanying Notes to Consolidated Financial Statements.
5
REGAL-BELOIT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three Years Ended December 31, 2001
(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 power generation products. The principal
markets for the Company's products and technologies are within the United
States.
- --------------------------------------------------------------------------------
(2) Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned and majority owned subsidiaries. The minority
interest in the earnings of the majority owned consolidated subsidiary is not
material.
Revenue Recognition
Sales and related cost of sales for all products are recognized upon
shipment of the products, as shipments are FOB shipping point.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. ("GAAP") 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,
2001.
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.
Life Insurance Policies
The Company maintains life insurance policies on certain officers and
management which name the Company as beneficiary. The total face value of these
policies was $7,963,000 at both December 31, 2001 and 2000. The cash surrender
value, net of policy loans, is $251,000 and $3,209,000 at December 31, 2001 and
2000, respectively, and is included as a component of Other Noncurrent Assets.
Intangible Assets
The cost of goodwill and other intangible assets is amortized on a
straight-line basis over the estimated periods benefited ranging from 5 to 40
years. Goodwill amortization was $8,401,000, $4,994,000 and $3,845,000 in 2001,
2000 and 1999, respectively. Accumulated goodwill amortization was $23,965,000
at December 31, 2001 and $15,564,000 at December 31, 2000.
6
Effective January 1, 2002, goodwill will no longer be amortized, in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". Intangible
assets with definitive lives will continue to be amortized. Goodwill and
intangible assets will be evaluated in 2002 for impairment of their carrying
values and at least annually thereafter. Earnings will be charged if the
carrying value of goodwill or an intangible asset exceeds its fair market value.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of these assets may
not be recoverable. The Company assesses these assets for impairment based on
estimated future cash flows from these assets.
Inventories
The approximate percentage distribution between major classes of
inventory is as follows:
December 31,
----------------------
2001 2000
--------- ---------
Raw Material.................... 11% 11%
Work In Process................. 19% 21%
Finished Goods and
Purchased Parts.............. 70% 68%
Inventories are stated at cost, which is not in excess of market. Cost for
approximately 87% of the Company's inventory at December 31, 2001 and 89% in
2000, 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 $4,417,000 and $3,233,000 as of December 31, 2001 and 2000,
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, plant and equipment retired or otherwise disposed
of is removed from the 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
Shipping and Handling Revenues and Costs
Shipping and handling costs are recorded as costs of sales and the
related billings are recorded as sales.
Reclassifications
Certain reclassifications were made to the 2000 and 1999 financial
statements to conform to the 2001 presentation.
Earnings per Share
The difference between basic and diluted earnings per share is
attributable to the incremental shares to be issued under the Company's stock
option plans which totaled 255,308, 11,766 and 210,398 at December 31, 2001,
2000 and 1999, respectively.
7
- --------------------------------------------------------------------------------
(3) Leases and Rental Commitments
Rental expenses charged to operations amounted to $7,314,000 in 2001,
$4,934,000 in 2000 and $4,189,000 in 1999. The Company has future minimum rental
commitments under operating leases as shown in the following table:
Year (In Thousands of Dollars)
------------------ -----------------------------------
2002 $4,164
2003 3,081
2004 2,926
2005 2,227
2006 1,847
Thereafter 2,037
- --------------------------------------------------------------------------------
(4) Acquisitions
On January 16, 2001, the Company acquired, for cash, selected assets of
Philadelphia Gear Company, which now comprises the Company's spiral bevel gear
product line. The purchased assets included inventory and selected machinery,
equipment and tooling. The operating results and assets purchased are not
material to the performance or financial position of the Company.
On September 29, 2000, the Company acquired 100% of the stock of Leeson
Electric Corporation, a private company, for approximately $260,000,000 in cash.
During 2001, the purchase price allocation was finalized and resulted in an
increase to goodwill of approximately $4,000,000. This resulted in approximately
$86,000,000 of the purchase price being allocated to the net assets acquired,
and the remaining $174,000,000 being recorded as goodwill. Leeson is a leading
North American manufacturer and marketer of electric motors and related
products. On June 29, 2000, the Company acquired the assets and liabilities of
Thomson Technology, Inc. ("TTI") for approximately $10,000,000. TTI is a
Vancouver, BC, Canada based manufacturer of power systems controls for the
worldwide power generation market.
On May 28, 1999, the Company purchased the Lincoln Motors business of
Lincoln Electric Holdings, Inc., for a cash purchase price of approximately
$32,100,000. Lincoln Motors manufactures and markets a line of AC electric
motors from 1 horsepower to 800 horsepower.
- --------------------------------------------------------------------------------
(5) Long-Term Debt and Bank Credit Facilities
(In Thousands of Dollars)
December 31,
------------------------------------------
Long-term debt consists of the following: 2001 2000
-------------------- ------------------
Revolving Credit Facility............................... $342,000 $392,500
Other................................................... 3,787 1,116
-------------------- ------------------
345,787 393,616
Less-Current maturities................................. 120 106
-------------------- ------------------
Noncurrent portion...................................... $345,667 $393,510
==================== ==================
The Company maintains a $375,000,000 revolving credit facility which
expires December 31, 2005 (the "Facility"). The Facility permits the Company to
borrow at interest rates based upon a margin above LIBOR, which margin varies
with the ratio of debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA"). These interest rates also vary with LIBOR. The
Facility, as amended during 2001, restricts the payment of dividends to the
current $.12 per quarter and also limits acquisitions for cash to $15 million
for an individual acquisition and to $30 million in the aggregate. The Company
has pledged in the amended facility the stock of its major subsidiaries as
security for this agreement. The stock pledge and the dividend and acquisition
restrictions are subject to release if the Company's ratio of funded debt to
EBITDA meets certain requirements. The Facility also includes various financial
covenants regarding minimum net worth, permitted debt levels and minimum
interest coverage. The most restrictive financial covenant included in the
Facility is the ratio of funded debt to EBITDA. This covenant ratio was 4.15 at
December 31, 2001, but declines in future quarters throughout 2002 to 3.25 at
December 31, 2002. The Company was in compliance with all financial covenants as
of December 31, 2001.
8
The average balance outstanding under the Facility in 2001 was
$372,512,000. The average interest rate paid under the Facility in 2001 was 5.9%
and was 4.2% at December 31, 2001. The Company had $30,200,000 of available
borrowing capacity, after deducting approximately $2,800,000 for standby letters
of credit, under the Facility at December 31, 2001. (See Management's Discussion
and Analysis of Financial Statements, "Liquidity and Capital Resources").
The Company also has other loans with a total balance outstanding of
$3,787,000 at December 31, 2001. The largest is a $2,000,000 industrial
development bond issue completed on September 6, 2001.
Based on the borrowing rates currently available to the Company for
bank loans with similar terms and average maturities, the fair market value of
long-term debt is not materially different from the carrying value.
Maturities of long-term debt are as follows:
Year (In Thousands of Dollars)
-------------------- ---------------------------------
2002 $120
2003 107
2004 232
2005 342,222
2006 678
Thereafter 2,428
--------
Total $345,787
========
- --------------------------------------------------------------------------------
(6) Contingencies
The Company is, from time to time, party to lawsuits arising from its
normal business operations. It is believed that the outcome of these lawsuits
will have no material effect on the Company's financial position or its results
of operations.
- --------------------------------------------------------------------------------
(7) Retirement Plans
The Company has a number of retirement plans that cover most of its
employees. The plans include defined contribution plans and defined benefit
plans. The defined contribution plans provide for company contributions based,
depending on the plan, upon one or more of participant contributions, service
and profits. Company contributions to defined contribution plans totaled
$3,329,000, $4,628,000 and $4,820,000 in 2001, 2000 and 1999, respectively.
Benefits provided under defined benefit plans are based, depending on the plan,
on employees' average earnings and years of credited service, or a benefit
multiplier times years of service. Funding of these qualified defined benefit
plans is in accordance with federal laws and regulations.
Net periodic pension benefit costs for the defined benefit plans were
as follows:
(In Thousands of Dollars)
--------------------------------------
2001 2000 1999
----------- --------- ----------
Service cost...... $1,330 $1,253 $1,375
Interest cost..... 3,078 2,993 2,809
Expected return
on plan assets. (5,410) (4,858) (4,158)
Net amortization
and deferral... (355) (125) 58
----------- --------- ----------
Net periodic
(income)
expense........ $(1,357) $(737) $84
=========== ========= ==========
9
The following table presents a reconciliation of the funded status of
the defined benefit plans using an assumed discount rate of 7.5% in 2001 and
2000, annual compensation increases of 3.75% in 2001 and 4.5% in 2000, and an
assumed long-term rate of return on plan assets of 9.0% in 2001 and 2000.
(In Thousands of Dollars)
-----------------------------
2001 2000
------------- ------------
Change in projected benefit obligation:
Obligation at beginning of period......... $41,042 $39,909
Service cost.............................. 1,330 1,253
Interest cost............................. 3,078 2,993
Change in assumptions..................... (882) (1,293)
Plan amendments........................... 403 131
Benefits paid............................. (1,863) (1,951)
------------- ------------
Obligation at end of period............... 43,108 41,042
------------- ------------
Change in fair value
of plan assets:
Fair value of plan assets at beginning
of period.............................. 60,844 60,601
Actual (loss) return on plan assets....... (11,582) 1,827
Employer contributions.................... 282 367
Benefits paid............................. (1,863) (1,951)
------------- ------------
Fair value of plan assets at end of 47,681 60,844
period.................................
------------- ------------
Funded status............................. 4,573 19,802
Unrecognized net actuarial loss
(gain).................................. 3,251 (13,289)
Unrecognized prior service costs........... 1,252 924
------------- ------------
Net amount recognized...................... $9,076 $7,437
============= ============
Amounts recognized in balance sheets:
Prepaid benefit cost.................. $11,077 $10,728
Accrued benefit liability............. (3,906) (3,291)
Intangible asset...................... 376 --
Accumulated other comprehensive
loss............................... 1,529 --
------------- ------------
Net amount recognized................. $9,076 $7,437
============= ============
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the defined benefit plans with accumulated benefit
obligations in excess of plan assets were $7,740,000, $7,699,000 and $4,094,000,
respectively, as of December 31, 2001, and $3,105,000, $3,054,000 and $0,
respectively, as of December 31, 2000.
- --------------------------------------------------------------------------------
(8) Shareholders' Investment
The Company has two stock option plans available for new grants to
officers, directors and key employees, the 1991 Flexible Stock Incentive Plan
and the 1998 Stock Option Plan. Additionally, the Company's 1987 Stock Option
Plan, which has expired as to new grants, has shares previously granted
remaining outstanding. Options under all the plans were granted at prices that
equalled the market value on the date of the grant and with a maximum term of 10
years from the date of grant. Options vest over various periods up to 10 years.
A summary of the Company's three stock option plans follows:
10
At December 31, 2001
-----------------------------------------------------------------
1987 Plan 1991 Plan 1998 Plan
------------------- -------------------- ------------------
Total Plan shares........................ 450,000 1,000,000 1,000,000
Options granted.......................... 449,850 776,682 691,600
Options outstanding...................... 38,700 745,124 676,300
Options available for grant.............. -- 223,318 308,400
A summary of the status of the Company's three stock option plans as of
December 31, 2001, 2000 and 1999, and changes during the years then ended is
presented below:
2001 2000 1999
--------------------------- -------------------------- --------------------------
Shares Weighted Shares Weighted Shares Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at beginning
of year................. 1,477,718 $18.01 1,430,682 $18.47 839,018 $14.18
Granted.................... 41,850 18.71 134,750 18.14 705,700 22.65
Exercised.................. (26,194) 7.52 (26,018) 6.97 (78,336) 9.33
Forfeited.................. (33,250) 21.28 (61,696) 22.61 (35,700) 23.43
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at end of year. 1,460,124 $18.49 1,477,718 $18.01 1,430,682 $18.47
Options exercisable at
year-end................ 889,824 865,968 656,265
The following table provides information on the three Plans at various
exercise price ranges:
Range of Exercise Prices
-----------------------------------------------------------------------------------
$7.18-$10.78 $10.79-$16.18 $16.19-$24.27 $24.28-$32.44 Total
-------------- ------------- ------------- ------------ -------------
Options outstanding
at 12/31/01 355,510 34,464 963,300 106,850 1,460,124
Options exercisable
at 12/31/01 355,510 29,464 401,000 103,850 889,824
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 ("EPS") would have been reduced to the
following pro-forma amounts:
(In Thousands, Except Per Share Data)
--------------------------------------------------------------
2001 2000 1999
--------------------- ------------------ ---------------
Net income:
As Reported................................ $19,590 $33,771 $38,067
Pro Forma.................................. $18,886 $33,018 $36,532
Earnings Per Share
As Reported................................ $.94 $1.61 $1.82
Pro Forma.................................. $.91 $1.57 $1.74
Earnings Per Share - Assuming Dilution
As Reported................................ $.93 $1.61 $1.80
Pro Forma.................................. $.89 $1.57 $1.73
11
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 2001, 2000 and 1999, respectively: risk-free
interest rates of 5.1%, 6.3% and 5.4%; expected dividend yield of 2.5% for all
years; expected option lives of 7.0 for all years; expected volatility of 33% in
both 2001 and 2000, and 32% in 1999.
On January 28, 2000, the Board of Directors approved a Shareholder
Rights Plan (the "Plan"). Pursuant to this Plan, one common share purchase right
is included with each outstanding share of common stock. In the event the rights
become exercisable, each right will initially entitle its holder to buy one-half
of one share of the Company's common stock at a price of $60 per share
(equivalent to $30 per one-half share), subject to adjustment. The rights will
become exercisable if a person or group acquires, or announces an offer for, 15%
or more of the Company's common stock. In this event, each right will thereafter
entitle the holder to purchase, at the right's then-current exercise price,
common stock of the Company or, depending on the circumstances, common stock of
the acquiring corporation having a market value of twice the full share exercise
price. The rights may be redeemed by the Company at a price of one-tenth of one
cent per right at any time prior to the time a person or group acquires 15% or
more of the Company's common stock. The rights expire on January 28, 2010,
unless otherwise extended.
The Board of Directors approved in 2000 a repurchase program of up to
2,000,000 common shares of Company stock. Management was authorized to effect
purchases from time to time in the open market or through privately negotiated
transactions. Through December 31, 2001, the Company repurchased 159,900 shares
at an average purchase price of $17.06 per share. Management ceased repurchases
in January 2001.
12
- --------------------------------------------------------------------------------
(9) Income Taxes
Earnings before income taxes consisted of the following:
(In Thousands of Dollars)
------------------------------------
2001 2000 1999
---------- --------- ---------
United States . . . . . . . . . . . . $30,213 $55,879 $62,143
Foreign . . . . . . . . . . . . . . . 3,829 671 1,111
---------- --------- ---------
Total . . . . . . . . . . . . . . . . $34,042 $56,550 $63,254
========== ========= =========
The provision for income taxes is summarized as follows:
(In Thousands of Dollars)
------------------------------------
2001 2000 1999
---------- --------- ---------
Current
Federal . . . . . . . . . . . . . $9,155 $12,858 $20,594
State . . . . . . . . . . . . . . 1,186 1,995 2,321
Foreign . . . . . . . . . . . . . 1,097 248 620
---------- --------- ---------
11,438 15,101 23,535
Deferred . . . . . . . . . . . . . . . 3,014 7,678 1,652
---------- --------- ---------
$14,452 $22,779 $25,187
========== ========= =========
A reconciliation of the statutory Federal income tax rate and the
effective tax rate reflected in the statements of income follows:
2001 2000 1999
---------- --------- ---------
Federal statutory tax rate . . . . . . 35.0% 35.0% 35.0%
State income taxes, net of federal
benefit . . . . . . . . . . . . . . . 2.3 2.5 3.0
Nondeductible goodwill amortization 4.0 2.4 2.3
Other, net . . . . . . . . . . . . . . 1.2 .4 (.5)
---------- --------- ---------
Effective tax rate . . . . . . . . . . 42.5% 40.3% 39.8%
========== ========= =========
13
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, 2001 of $34,602,000 is classified on the consolidated balance
sheet as a current income tax benefit of $8,420,000 and a long-term deferred
income tax liability of $43,022,000. The December 31, 2000 net deferred tax
liability was $31,588,000, consisting of a current income tax benefit of
$9,475,000 and a long-term deferred income tax liability of $41,063,000. The
components of this net deferred tax liability are as follows:
(In Thousands of Dollars)
December 31
-----------------------------
2001 2000
------------ -------------
Federal operating
loss carry forward . . . . . . . . $277 $401
Accrued employee
benefits . . . . . . . . . . . . . 1,349 1,495
Bad debt reserve . . . . . . . . . . 768 443
Warranty reserve . . . . . . . . . . 682 1,067
Other . . . . . . . . . . . . . . . . 215 2,542
------------ -------------
Deferred tax assets . . . . . . . 3,291 5,948
Property related . . . . . . . . . . (29,121) (29,643)
Inventory . . . . . . . . . . . . . . (4,935) (3,608)
Other . . . . . . . . . . . . . . . . (3,837) (4,285)
------------ -------------
Deferred tax liabilities . . . . . (37,893) (37,536)
------------ -------------
Net deferred tax liability. . . . . . $(34,602) $(31,588)
============ =============
- --------------------------------------------------------------------------------
(10) Industry Segment Information
The Company's reportable segments are strategic businesses that offer
different products and services. The Company has two such reportable segments:
Mechanical Group and Electrical Group. The Mechanical Group produces mechanical
speed reducers and related products for sale to original equipment manufacturers
and distributors. The Electrical Group produces electric motors, power
generation equipment and related products for sale to original equipment
manufacturers and distributors.
The Company evaluates performance based on the segments' income from
operations. Corporate costs have been allocated to each group based primarily on
the net sales of each group. The reported net sales of each segment are solely
from external customers. No single customer accounts for 10% or more of the
Company's net sales.
The Company's products manufactured and sold outside the United States
were approximately 8%, 4% and 3% of net sales in 2001, 2000 and 1999,
respectively. Export sales from U.S. operations were approximately 6% of net
sales in 2001, 6% in 2000 and 7% in 1999.
14
Pertinent data for each industry segment in which the Company operated
for the three years ended December 31, 2001 is as follows:
(In Thousands of Dollars)
----------------------------------------------------------------------------------------
Depreciation
Income From Identifiable Capital and
Net Sales Operations Assets Expenditures Amortization
------------- --------------- -------------- -------------- --------------
2001
Mechanical Group . . . . . $206,615 $15,872 $125,201 $5,110 $8,824
Electrical Group . . . . . 456,956 40,188 621,398(A) 10,316 22,974
------------- --------------- -------------- -------------- --------------
Total REGAL-BELOIT . . . . $663,571 $56,060 $746,599 $15,426 $31,798
============= =============== ============== ============== ==============
2000
Mechanical Group . . . . . $244,249 $30,794 $142,145 $6,515 $9,663
Electrical Group . . . . . 353,954 40,814 650,262(A) 10,479 15,886
------------- --------------- -------------- -------------- --------------
Total REGAL-BELOIT . . . . $598,203 $71,608 $792,407 $16,994 $25,549
============= =============== ============== ============== ==============
1999
Mechanical Group . . . . . $254,967 $35,732 $145,391 $4,257 $10,910
Electrical Group . . . . . 295,694 36,708 362,774(A) 7,165 12,142
------------- --------------- -------------- -------------- --------------
Total REGAL-BELOIT . . . . $550,661 $72,440 $508,165 $11,422 $23,052
============= =============== ============== ============== ==============
(A) Includes $312,735 in 2001, $316,295 in 2000 and $143,314 in 1999 of goodwill relating to Electrical Group
acquisitions.
15