form10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

             FORM 10-Q
 
ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
for the quarterly period ended
June 27, 2009
or
 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number
001-07283
 
REGAL BELOIT CORPORATION
(Exact name of registrant as specified in its charter)

 
Wisconsin
39-0875718
(State of other jurisdiction of incorporation)
(IRS Employer Identification No.)

200 State Street, Beloit, Wisconsin  53511
(Address of principal executive office)

(608) 364-8800
Registrant’s telephone number, including area code

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 ý   NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ¨   NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a “smaller reporting company.”  See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filer  ý     Accelerated Filer  ¨         Non-accelerated filer     ¨  Smaller Reporting Company  ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨  NO ý

35,822,815 Shares, Common Stock, $.01 Par Value (as of  August 5, 2009)

 
1
 

REGAL BELOIT CORPORATION

INDEX
 
Page
 
Item 1 -
Condensed Consolidated Financial Statements (Unaudited)
  
 
Condensed Consolidated Statements of Earnings
3
 
Condensed Consolidated Balance Sheets
4
 
Condensed Consolidated Statement of Equity
5
 
Condensed Consolidated Statements of Cash Flows
6
 
Notes to Condensed Consolidated Financial Statements
7
Item 2 -
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
Item 3 -
Quantitative and Qualitative Disclosures about Market Risk
21
Item 4 -
Controls and Procedures
21
     
PART II - OTHER INFORMATION
  
Item 1 -
Legal Proceedings
22
Item 1A -
Risk Factors
22
Item 2 -
Unregistered Sales of Equity Securities and Use of Proceeds
22
Item 4 -
Submission of Matters to a Vote of Security Holders
23
Item 6 -
Exhibits
24
Signature
25
Index to Exhibits
26

CAUTIONARY STATEMENT

This Quarterly Report contains “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements represent our management’s judgment regarding future events.  In many cases, you can identify forward-looking statements by terminology such as “may,” “will,”  “plan,” “expect,” “anticipate,” “estimate,” “believe,” or “continue” or the negative of these terms or other similar words.  Actual results and events could differ materially and adversely from those contained in the forward-looking statements due to a number of factors, including:
·  
economic changes in global markets where we do business, such as reduced demand for products we sell, weakness in the housing and commercial real estate markets, currency exchange rates, inflation rates, interest rates, recession, foreign government policies and other external factors that we cannot control;
·  
unanticipated fluctuations in commodity prices and raw material costs;
·  
cyclical downturns affecting the global market for capital goods;
·  
unexpected issues and costs arising from the integration of acquired companies and businesses;
·  
marketplace acceptance of new and existing products including the loss of, or a decline in business from, any significant customers;
·  
the impact of capital market transactions that we may effect;
·  
the availability and effectiveness of our information technology systems;
·  
unanticipated costs associated with litigation matters;
·  
actions taken by our competitors, including new product introductions or technological advances, and other events affecting our industry and competitors;
·  
difficulties in staffing and managing foreign operations; and other domestic and international economic and political factors unrelated to our performance, such as the current substantial weakness in economic and business conditions and the stock markets as a whole; and
·  
other risks and uncertainties including but not limited to those described in Item 1A-Risk Factors of the Company’s Annual Report on Form 10-K filed on February 25, 2009 and from time to time in our reports filed with U.S. Securities and Exchange Commission.

All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements.  The forward-looking statements included in this Form 10-Q are made only as of their respective dates, and we undertake no obligation to update these statements to reflect subsequent events or circumstances.  See also Item 1A - Risk Factors in the Company’s Annual Report on Form 10-K filed on February 25, 2009.

 
2
 

PART I - FINANCIAL INFORMATION
REGAL BELOIT CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In Thousands of Dollars, Except Shares Outstanding, Dividends Declared and Per Share Data)

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   
Three Months Ended
    
Six Months Ended
  
   
June 27, 2009
    
(As Adjusted,
    
June 27, 2009
    
(As Adjusted,
  
   
See Note 2)
    
See Note 2)
  
   
June 28, 2008
    
June 28, 2008
  
                         
Net Sales
   $ 454,550     $ 606,316     $ 897,824     $ 1,142,659  
                                 
Cost of Sales
     359,928       475,139       712,632       889,383  
                                 
Gross Profit
     94,622       131,177       185,192       253,276  
                                 
Operating Expenses
     65,155       63,683       127,533       128,170  
                                 
Income From Operations
     29,467       67,494       57,659       125,106  
                                 
Interest Expense
     5,501       8,357       12,620       16,770  
                                 
Interest Income
     377       531       510       915  
                                 
Income Before Taxes & Noncontrolling Interests
     24,343       59,668       45,549       109,251  
                                 
Provision For Income Taxes
     6,822       21,086       14,052       38,644  
                                 
Net Income
     17,521       38,582       31,497       70,607  
                                 
Less: Net Income Attributable to Noncontrolling
                                
Interests, net of tax
     1,069       1,269       2,258       1,867  
                                 
Net Income Attributable to Regal Beloit Corporation
   $ 16,452     $ 37,313     $ 29,239     $ 68,740  
                                 
Earnings Per Share of Common Stock:
                                
                                 
Basic
   $ 0.49     $ 1.19     $ 0.90     $ 2.19  
                                 
Assuming Dilution
   $ 0.47     $ 1.11     $ 0.86     $ 2.06  
                                 
Cash Dividends Declared
   $ 0.16     $ 0.16     $ 0.32     $ 0.31  
                                 
Weighted Average Number of Shares Outstanding:
                                
                                 
Basic
     33,256,281       31,305,715       32,356,782       31,311,296  
Assuming Dilution
     35,105,383       33,525,725       33,850,093       33,321,379  

See accompanying Notes to Condensed Consolidated Financial Statements.

 
3
 

REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except per Share Data)

   
(Unaudited)
    
(As Adjusted, From Audited Statements, See Note 2)
  
ASSETS
  
June 27, 2009
    
December 27, 2008
  
Current Assets:
            
Cash and Cash Equivalents
   $ 290,549     $ 65,250  
Trade Receivables, less Allowances of $13,156 in 2009, and
                
$11,145 in 2008
     285,891       294,326  
Inventories,net
     269,216       359,918  
Prepaid Expenses and Other Current Assets
     75,733       66,594  
Deferred Income Tax Benefits
     46,405       75,174  
Total Current Assets
     967,794       861,262  
                 
Property, Plant and Equipment:
                
Land and Improvements
     37,977       39,982  
Buildings and Improvements
     127,940       127,018  
Machinery and Equipment
     473,356       457,063  
Property, Plant and Equipment, at Cost
     639,273       624,063  
Less - Accumulated Depreciation
     (288,026 )     (265,691 )
Net Property, Plant and Equipment
     351,247       358,372  
                 
Goodwill
     671,377       672,475  
Intangible Assets, Net of Amortization
     122,564       120,784  
Other Noncurrent Assets
     11,595       10,603  
Total Assets
   $ 2,124,577     $ 2,023,496  
                 
LIABILITIES AND EQUITY
                
Current Liabilities:
                
Accounts Payable
     161,653       202,456  
Dividends Payable
     5,731       5,024  
Accrued Compensation and Employee Benefits
     56,129       64,207  
Other Accrued Expenses
     73,292       63,457  
Hedging Obligations
     16,347       80,578  
Current Maturities of Debt
     4,987       15,280  
Total Current Liabilities
     318,139       431,002  
                 
Long-Term Debt
     548,115       560,127  
Deferred Income Taxes
     85,052       72,119  
Hedging Obligations
     36,434       61,958  
Pension and Other Post Retirement Benefits
     44,648       43,768  
Other Noncurrent Liabilities
     11,758       16,881  
                 
Equity:
                
Regal Beloit Corporation Shareholders' Equity:
                
Common Stock, $.01 par value, 100,000,000 shares
                
authorized,  36,703,381 issued in 2009, and
                
32,282,395 shares issued in 2008
     367       323  
Additional Paid-In Capital
     509,359       356,231  
Less - Treasury Stock, at cost, 884,100 shares in 2009 and 2008
     (19,419 )     (19,419 )
Retained Earnings
     649,751       631,281  
Accumulated Other Comprehensive Loss
     (74,949 )     (142,429 )
Total Regal Beloit Corporation Shareholders' Equity
     1,065,109       825,987  
Noncontrolling Interests
     15,322       11,654  
Total Equity
     1,080,431       837,641  
Total Liabilities and Equity
   $ 2,124,577      $ 2,023,496  
See accompanying Notes to Condensed Consolidated Financial Statements.

 
4
 
REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
 (In Thousands of Dollars, Except Per Share Data)

   
Common Stock $.01 Par Value
    
Additional Paid-In Capital
    
Treasury Stock
    
Retained Earnings
    
Accumulated Other Comprehensive Income (Loss)
    
Noncontrolling
Interests
    
Total
Equity
  
Balance as of December 29, 2007
   $ 321     $ 348,971     $ (15,228 )   $ 525,506     $ 2,180     $ 10,542     $ 872,292  
(As Adjusted, See Note 2)
                                                        
                                                         
Net Income
   $ -     $ -     $ -     $ 68,740     $ -     $ 1,867     $ 70,607  
Dividends Declared
                                                        
($.31 per share)
     -       -       -       (9,704 )     -       -       (9,704 )
Purchase of 110,000
                                                        
shares of Treasury Stock
     -       -       (4,191 )     -       -       -       (4,191 )
Stock Options
                                                        
Exercised,
                                                        
including income
                                                
tax benefit and share
                                                
cancellations
     1       1,886       -       -       -       -       1,887  
Stock-based Compensation
     -       1,961       -       -       -       -       1,961  
Other Comprehensive
                                                        
Income (Loss) by
                                                        
Classification:
                                                        
Currency Translation
                                                        
adjustments
     -       -       -       -       (1,628 )     742       (886 )
Hedging Activities, net
                                                        
of tax
     -       -       -       -       8,749       -       8,749  
Pension and Post
                                                        
Retirement Benefits,
                                                        
net of tax
     -       -       -       -       (104 )     -       (104 )
Balance as of June 28, 2008
   $ 322     $ 352,818     $ (19,419 )   $ 584,542     $ 9,197     $ 13,151     $ 940,611  
                                                         
   
Regal Beloit Corporation Shareholders' Equity
                  
   
Common Stock $.01 Par Value
    
Additional Paid-In Capital
    
Treasury Stock
    
Retained Earnings
    
Accumulated Other Comprehensive Income (Loss)
    
Noncontrolling
Interests
    
Total
Equity
  
Balance as of December 27, 2008
   $ 323     $ 356,231     $ (19,419 )   $ 631,281     $ (142,429 )   $ 11,654     $ 837,641  
(As Adjusted, See Note 2)
                                                        
                                                         
Net Income
   $ -     $ -     $ -     $ 29,239     $ -     $ 2,258     $ 31,497  
Dividends Declared
                                                        
($.32 per share)
     -       -       -       (10,769 )     -       -       (10,769 )
 Sale of 4,312,500 shares of
                                                        
common stock
     43       150,507       -       -       -       -       150,550  
Stock Options
                                                        
Exercised, 
                                                        
including income
                                                
tax benefit and share
                                                
cancellations
     1       662       -       -       -       -       663  
Stock-based Compensation
     -       1,959       -       -       -       -       1,959  
Other Comprehensive
                                                        
Income (Loss) by
                                                        
Classification:
                                                        
Currency Translation
                                                        
adjustments
     -       -       -       -       5,654       1,410       7,064  
Hedging Activities, net
                                                        
of tax
     -       -       -       -       61,052       -       61,052  
Pension and Post
                                                        
Retirement Benefits,
                                                        
net of tax
     -       -       -       -       774       -       774  
Balance as of June 27, 2009
   $ 367     $ 509,359     $ (19,419 )   $ 649,751     $ (74,949 )   $ 15,322     $ 1,080,431  
See accompanying Notes to Condensed Consolidated Financial Statements.
 
5
 
REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
   
Six Months Ended
  
         
(As Adjusted, See Note 2)
  
   
June 27, 2009
    
June 28, 2008
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net income
   $ 31,497     $ 70,607  
Adjustments to reconcile net income to net cash provided
                
by operating activities:
                
Depreciation and amortization
     33,793       30,211  
Excess tax benefits from stock-based compensation
     (1,767 )     (1,333 )
(Gain) loss on sale of assets, net
     (91 )     70  
Stock-based compensation expense
     1,959       1,961  
Non-cash convertible debt deferred financing costs
     1,063       2,424  
Change in assets and liabilities, net of acquisitions
     59,031       12,345  
Net cash provided by operating activities
     125,485       116,285  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Additions to property, plant and equipment
     (18,614 )     (28,134 )
Business acquisitions, net of cash acquired
     (1,500 )     (15,805 )
Sale of property, plant and equipment
     306       1,149  
Net cash used in investing activities
     (19,808 )     (42,790 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Net repayments of short-term borrowings
     (10,295 )     (92 )
Payments of long-term debt
     (108 )     (233 )
Net borrowings (repayments) under revolving credit facility
     (13,207 )     (182,700 )
Net proceeds from long-term borrowings
     -       165,000  
Net proceeds from the sale of common stock
     150,550       -  
Dividends paid to shareholders
     (10,063 )     (9,392 )
Purchases of treasury stock
     -       (4,191 )
Proceeds from the exercise of stock options
     631       1,739  
Excess tax benefits from stock-based compensation
     1,767       1,333  
Financing fees paid
     -       (418 )
Net cash provided by (used in) financing activities
     119,275       (28,954 )
                 
EFFECT OF EXCHANGE RATES ON CASH
     347       595  
                 
Net increase in cash and cash equivalents
     225,299       45,136  
Cash and cash equivalents at beginning of period
     65,250       42,574  
Cash and cash equivalents at end of period
   $ 290,549     $ 87,710  
See accompanying Notes to Condensed Consolidated Financial Statements.

 
6
 

REGAL BELOIT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 27, 2009
(Unaudited)

1.   BASIS OF PRESENTATION

The accompanying (a) condensed consolidated balance sheet as of December 27, 2008, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of June 27, 2009, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s 2008 Annual Report on Form 10-K filed on February 25, 2009.

As of the beginning of fiscal 2009, the Company adopted the following pronouncements which require us to adjust previously disclosed condensed consolidated financial statements.  As such, certain prior period amounts have been adjusted in the unaudited condensed consolidated financial statements to conform to the current period presentation.

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 amends the accounting and reporting for noncontrolling interests in a consolidated subsidiary and the deconsolidation of a subsidiary. Under SFAS 160, we now report noncontrolling interests in subsidiaries as a separate component of equity in the condensed consolidated financial statements and show both net income attributable to the noncontrolling interest and net income attributable to the controlling interest on the face of the condensed consolidated income statement. SFAS 160 applies prospectively, except for presentation and disclosure requirements, which are applied retrospectively.

The Company adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). The adoption of FSP APB 14-1 required an adjustment of convertible debt, equity, and interest expense. (See Note 2 of Notes to Condensed Consolidated Financial Statements.)

As of June 27, 2009, the Company adopted SFAS No. 165, “Subsequent Events” (“SFAS 165”).  SFAS 165 establishes general standards and requirements for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  It requires the disclosure of the date through which an entity had evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued.  The Company has evaluated subsequent events through August 5, 2009, which is the date the financial statements were issued.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 provides for the FASB Accounting Standards Codification TM (the “Codification”) to become the single official source of authoritative, nongovernmental U.S. Generally Accepted Accounting Principles (“GAAP”), except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”), which are also sources of authoritative GAAP for SEC registrants. The Codification did not change GAAP but reorganizes the literature using a consistent structure. SFAS 168 is effective financial statements issued for interim and annual periods ending after September 15, 2009. As the Codification was not intended to change or alter existing GAAP, it is not expected to impact the consolidated financial statements, however the Company will cease using prior GAAP references and begin to use the new Codification when referring to GAAP in the Notes to Condensed Consolidated Financial Statements in its quarterly report on Form 10-Q for the third quarter ending September 26, 2009.

FSP FAS 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), requires disclosures about the fair value of financial instruments in interim reporting periods of publicly traded companies as well as in annual financial statements. The provisions of FSP FAS 107-1 and APB  28-1 are effective for the Company’s interim period ending on June 27, 2009. FSP FAS 107-1 and APB 28-1 amends only the Company’s disclosure requirements. See Note 9 – Debt and Bank Credit Facilities in Notes to Condensed Consolidated Financial Statements for information regarding the fair value of financial instruments at June 27, 2009.

 
7
 

 
Certain non-trade receivables at December 27, 2008 have been reclassified from Receivables to Prepaid Expenses and Other Current Assets to conform to the 2009 presentation. Trade Receivables less Allowances on the Condensed Consolidated Balance Sheets is now comprised of trade receivables net of estimated allowances.

In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made.  Except as otherwise discussed, such adjustments consist of only those of a normal recurring nature.  Operating results for the three and six months ended June 27, 2009 are not necessarily indicative of the results that may be expected for the entire fiscal year ending January 2, 2010.

The Company operates on a 52/53 week fiscal year, and fiscal 2009 will be a 53 week year with an additional week in the fiscal fourth quarter.

2.   ADOPTION OF FSP APB 14-1

As of the beginning of fiscal 2009, the Company adopted FSP APB 14-1 which requires an adjustment of convertible debt, equity, and interest expense. The new standard requires that a fair value be assigned to the equity conversion option of the Company’s $115.0 million, 2.75% convertible senior subordinated notes (the “Convertible Notes”) as of April 5, 2004, the date of issuance of the Convertible Notes.  This change results in a corresponding decrease in the value assigned to the debt portion of the instrument.

The value assigned to the debt portion of the Convertible Notes was determined based on market interest rates for similar debt instruments without the conversion feature as of April 5, 2004, the issuance date of the Convertible Notes.  The difference in this interest rate versus the coupon rate on the Convertible Notes is then amortized into interest expense over the expected term of the Convertible Notes.  For purposes of the valuation, the Company used an expected term of five years, which represents the first anniversary date at which holders of the Convertible Notes may put their Convertible Notes back to the Company.

The five year anniversary occurred in March 2009, and through June 27, 2009, no Convertible Notes were put to the Company and no Convertible Notes were called by the Company. Accordingly, the book value as of June 27, 2009 equals the par value of the Convertible Notes, and interest expense will equal the coupon rate in future periods.

The adjustment affected our balance sheet as follows (in thousands):

   
December 27, 2008
  
   
As Adjusted
    
As Reported
  
Long-Term Debt
   $ 560,127     $ 561,190  
Deferred Income Taxes
     72,119       71,715  
Additional Paid-in Capital
     356,231       342,712  
Retained Earnings
     631,281       644,141  

The adjustment of interest expense for the three and six months ended June 28, 2008 was as follows (in thousands, except per share data):

   
Three Months Ended
    
Six Months Ended
  
   
June 28, 2008
    
June 28, 2008
  
   
As Adjusted
    
As Reported
    
As Adjusted
    
As Reported
  
Interest Expense
   $ 8,357     $ 7,127     $ 16,770     $ 14,346  
Income Before Taxes and
                                
Noncontrolling Interests
     59,668       60,898       109,251       111,675  
Provision for Income Taxes
     21,086       21,553       38,644       39,565  
Net Income
     38,582       39,345       70,607       72,110  
Net Income Attributable to Regal Beloit Corporation
     37,313       38,076       68,740       70,243  
Earnings per Share of Common Stock
                                
Basic
   $ 1.19     $ 1.21     $ 2.19     $ 2.24  
Assuming Dilution
     1.11       1.14       2.06       2.11  

The full year impact of the adjustment for the fiscal year ended December 27, 2008 reduced diluted earnings per share from $3.87 to $3.77.

3.   INVENTORIES

Cost for approximately 59% 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 was as follows:

 
June 27, 2009
December 27, 2008
Raw Material and Work in Process
32%
29%
Finished Goods and Purchased Parts
68%
71%

 
8
 
4.   ACQUISITIONS

The results of operations for acquired businesses are included in the Condensed Consolidated Financial Statements from the dates of acquisition.  In January, 2009, the Company acquired Custom Power Technology (“CPT”), a custom power electronics business located in Menomonee Falls, Wisconsin. The purchase price and impact in our Condensed Consolidated Financial Statements was not significant. The following acquisitions in 2008 were not considered to be material business combinations.

2008 Acquisitions

On April 25, 2008 the Company acquired Joyce Court Holdings Ltd. and Grand Delight Investments Ltd., sole shareholders of Wuxi Hwada Motor Co. and Wuxi New Hwada Motor Co. (collectively “Hwada”) located in Wuxi, China.  Hwada is a leading designer and manufacturer of Integral IEC and NEMA electric motors, which are used in various industrial applications such as compressor, pump, paper and steel processing and power plants.  Approximately 50% of Hwada’s product sales are in the China industrial markets.  The business is reported as part of the Company’s Electrical segment.

On September 30, 2008, the Company acquired Dutchi Motors B.V. (“Dutchi”) located in Arnhem, The Netherlands.  Dutchi is a leading distributor of industrial motors in Western and Eastern Europe, South Africa, Russia and the Middle East.  Dutchi is one of the largest distributors of the Company’s Hwada motor products. The Dutchi business is reported as part of the Company’s Electrical segment.

5.   COMPREHENSIVE INCOME

The Company's consolidated comprehensive income for the three and six months ended June 27, 2009 and June 28, 2008, respectively , was as follows (in thousands):
   
Three Months Ending
    
Six Months Ending
  
         
(As Adjusted, See Note 2)
          
(As Adjusted, See Note 2)
  
   
June 27, 2009
    
June 28, 2008
    
June 27, 2009
    
June 28, 2008
  
Net income
   $ 17,521     $ 38,582     $ 31,497     $ 70,607  
Other Comprehensive Income (Loss) from:
                                
Currency Translation adjustments
     9,620       (2,671 )     7,064       (886 )
Changes in fair value of hedging activities, net of tax
     24,204       3,080       48,571       13,857  
Hedging activities reclassified into earnings from accumulated other comprehensive income (loss) ("AOCI"), net of tax
     17,505       (4,668 )     35,113       (5,108 )
Deferred losses on closed hedge contracts, net of tax
     (7,847 )     -       (22,632 )     -  
Amortization of net prior service costs and actuarial losses
     100       (199 )     774       (104 )
Comprehensive income
   $ 61,103     $ 34,124     $ 100,387     $ 78,366  

The amount of comprehensive income attributable to noncontrolling interests was $1.1 million and $3.7 million for the three and six months ended June 27, 2009.  The amount of comprehensive income attributable to noncontrolling interests was $1.5 million and $2.6 million for the three and six months ended June 28, 2008.

Foreign currency translation adjustments, unrealized gains and losses on derivative instruments and pension liability adjustments are included in Equity under Accumulated Other Comprehensive Loss.  The components of the ending balances of Accumulated Other Comprehensive Loss are as follows:
   
June 27, 2009
    
December 27, 2008
  
Translation adjustments
   $ (15,550 )   $ (21,204 )
Hedging activities, net of tax
     (37,880 )     (98,932 )
Pension and post retirement benefits, net of tax
     (21,519 )     (22,293 )
    $ (74,949 )   $ (142,429 )

6.   WARRANTY COSTS

The Company recognizes the cost associated with its standard warranty on its products at the time of sale.  The amount recognized is based on historical experience.  The following is a reconciliation of the changes in accrued warranty costs for the three and six months ended June 27, 2009 and June 28, 2008 (in thousands):

   
Three Months Ending
    
Six Months Ending
  
   
June 27, 2009
    
June 28, 2008
    
June 27, 2009
    
June 28, 2008
  
Beginning balance
   $ 9,953     $ 9,951     $ 11,022     $ 9,872  
Deduct:  Payments
     (2,572 )     (1,662 )     (5,319 )     (3,398 )
Add:  Provision
     3,179       1,935       4,933       3,774  
Translation Adjustments
     90       (3 )     14       (27 )
Ending balance
   $ 10,650     $ 10,221     $ 10,650     $ 10,221  

 
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7.   BUSINESS SEGMENTS

The Company has two strategic businesses that are reportable segments, Mechanical and Electrical (in thousands):

   
Mechanical Segment
    
Electrical Segment
    
Mechanical Segment
    
Electrical Segment
  
   
Three Months Ending
    
Three Months Ending
    
Six Months Ending
    
Six Months Ending
  
   
June 27,
2009
    
June 28,
2008
    
June 27,
2009
    
June 28,
2008
    
June 27,
2009
    
June 28,
2008
    
June 27,
2009
    
June 28,
2008
  
Net Sales
   $ 47,306     $ 65,261     $ 407,244     $ 541,055     $ 99,218     $ 127,811     $ 798,606     $ 1,014,848  
Income from
                                                                
Operations
     4,128       9,600       25,339       57,894       10,415       19,647       47,244       105,459  
% of Net Sales
     8.7 %     14.7 %     6.2 %     10.7 %     10.5 %     15.4 %     5.9 %     10.4 %
Goodwill at
                                                                
end of period
   $ 530     $ 530     $ 670,847     $ 636,921     $ 530     $ 530     $ 670,847     $ 636,921  

In the fourth quarter of 2008, an Electrical segment business was moved to the Mechanical segment due to a management reporting change, and prior period segment information has been adjusted. The impact of the change was not material.

8.   GOODWILL AND OTHER INTANGIBLES

Goodwill

In accordance with Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets,” we perform a annual impairment test of goodwill during the fourth quarter or more frequently if events or circumstances change that would more likely than not reduce the fair value of our reporting units below their carrying value.

Because of the on-going unfavorable impact of the credit crisis and the current global economic environment, we completed an assessment of impairment indicators during the second quarter of 2009. We considered a number of factors, including, among other things, recent operational, revenue, profitability and cash flow trends. We also considered the effect of the volatility in our stock price and trends in the discount rate used in our goodwill fair value estimate.

As a result of reviewing these impairment indicators, we noted that our consolidated revenues declined 25.0% during the second quarter of 2009 as compared to the second quarter of 2008, with similar declines in most of our reporting units, which was a larger decline than we estimated in our annual 2008 goodwill impairment assessment.

Our stock price and our resulting market capitalization increased during the second quarter of 2009. Our stock price was $40.30 as of June 26, 2009 as compared to $31.21 as of March 27, 2009. Our book value per share was $32.49 as of June 27, 2009 and $27.76 as of March 28, 2009. We expect that there may continue to be volatility in our stock price due to changes in market conditions and expectations; however, our market capitalization continues to be greater than our book value at our quarter-end.
 
As a result of this impairment indicator, during the second quarter of 2009, we performed an interim goodwill impairment test for two of our goodwill reporting units using the income approach and a discount rate of 12.6%.  The methodology used in our annual goodwill impairment test during the fourth quarter of 2008.

Based on our assessments, we concluded it was more likely than not that the fair value of our reporting units continued to exceed their carrying value at June 27, 2009, supporting our conclusion that our recorded goodwill was not impaired.

Our annual impairment test will occur in the fourth quarter of 2009.  If we continue to experience further erosion of actual and projected revenues or an increase in our discount rate assumption, it is possible that we may have an impairment charge related to one or more of our reporting units.

As described above in Note 4 of Notes to Condensed Consolidated Financial Statements, the Company acquired one business in 2009 and two businesses in 2008.  The purchase price allocation for the Dutchi acquisition is preliminary, pending the finalization of working capital, valuations and further analysis of contingencies.  The excess of purchase price over estimated fair value was assigned to goodwill.  Adjustments to the estimated fair value of the net assets acquired may be recorded during the measurement period, not to exceed one year from the date of acquisition.

 
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A preliminary allocation of $18.2 million was included in goodwill at June 27, 2009 related to the Dutchi acquisition.

The Company believes that substantially all of the goodwill is deductible for tax purposes. The following information presents changes to goodwill during the periods indicated (in thousands):
   
Electrical
Segment
    
Mechanical
Segment
    
Total
  
Balance as of December 27, 2008
   $ 671,945     $ 530     $ 672,475  
Net Acquisitions and Fair Value Adjustments
     1,142       -     $ 1,142  
Translation Adjustments
     (2,240 )     -     $ (2,240 )
Balance as of June 27, 2009
   $ 670,847     $ 530     $ 671,377  

Intangible Assets

Intangible assets consisted of the following (in thousands):
Gross Intangibles
  
Asset Description
  
Useful Life
(years)
    
December 27, 2008
    
Net Acquisitions
and Fair Value
Adjustments
    
Translation Adjustments
    
June 27, 2009
  
Non-Compete Agreements
     5     $ 5,767     $ 575     $ 3     $ 6,345  
Trademarks
     3 - 21       19,490       710       224       20,424  
Patents
     10       15,410       -       -       15,410  
Engineering Drawings
     10       1,200       -       -       1,200  
Customer Relationships
     9 - 15       92,633       2,180       189       95,002  
Technology
     6 - 11       25,439       6,844       542       32,825  
Total Gross Intangibles
           $ 159,939     $ 10,309     $ 958     $ 171,206  
                                         
Accumulated Amortization
  
Asset Description
  
Useful Life
(years)
    
December 27, 2008
    
Amortization
    
Translation Adjustments
    
June 27, 2009
  
Non-Compete Agreements
     5     $ (3,755 )   $ (635 )   $ (2 )   $ (4,392 )
Trademarks
     3 - 21       (6,026 )     (768 )     (19 )     (6,813 )
Patents
     10       (6,190 )     (771 )     -       (6,961 )
Engineering Drawings
     10       (487 )     (60 )     -       (547 )
Customer Relationships
     9 - 15       (18,625 )     (4,723 )     (61 )     (23,409 )
Technology
     6 - 11       (4,072 )     (2,363 )     (85 )     (6,520 )
Total Accumulated Amortization
           $ (39,155 )   $ (9,320 )   $ (167 )   $ (48,642 )
                                         
Intangible Assets, Net of Amortization
     $ 120,784                     $ 122,564  


 
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Estimated Amortization (in millions)

2009
    
2010
    
2011
    
2012
    
2013
  
$ 16.2     $ 15.0     $ 14.2     $ 14.3     $ 14.2  

Amortization expense recorded for the three and six months ended June 27, 2009 was $5.1 million and $9.3 million, respectively.  The Company has elected to perform its annual test for impairment as required by SFAS 142, “Goodwill and Other Intangible Assets,” during the fourth quarter.

9.   DEBT AND BANK CREDIT FACILITIES

The Company’s indebtedness as of June 27, 2009 and December 27, 2008 was as follows (in thousands):

         
(As Adjusted, See Note 2)
  
   
June 27, 2009
    
December 27, 2008
  
Senior notes
   $ 250,000     $ 250,000  
Term loan
     165,000       165,000  
Revolving credit facility
     7,035       20,000  
Convertible senior subordinated debt
     115,000       113,937  
Other
     16,067       26,470  
      553,102       575,407  
Less:  Current maturities
     (4,987 )     (15,280 )
Non-current portion
   $ 548,115     $ 560,127  

During 2007, in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, the Company issued and sold $250.0 million of senior notes (the “Notes”).  The Notes were sold pursuant to a Note Purchase Agreement (the “Agreement”) by and among the Company and the purchasers of the Notes.  The Notes were issued and sold in two series:  $150.0 million in Floating Rate Series 2007A Senior Notes, Tranche A, due August 23, 2014, and $100.0 million in Floating Rate Series 2007A Senior Notes, Tranche B, due August 23, 2017.  The Notes bear interest at a margin over the London Inter-Bank Offered Rate (“LIBOR”), which margin varies with the ratio of the Company’s consolidated debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) as defined in the Agreement.  These interest rates also vary as LIBOR varies.  The Agreement permits the Company to issue and sell additional note series, subject to certain terms and conditions described in the Agreement, up to a total of $600.0 million in combined Notes.

In 2008, the Company entered into a Term Loan Agreement (“Term Loan”) with certain financial institutions, whereby the Company borrowed an aggregate principal amount of $165.0 million. The Term Loan matures in June 2013, and borrowings generally bear interest at a variable rate equal to (i) a margin over LIBOR, which margin varies depending on whether certain criteria are satisfied, or (ii) the alternate base rate as defined in the agreement.  At June 27, 2009, the interest rate of 1.3% was based on a margin over LIBOR.

The Company’s $500.0 million revolving credit facility (“Facility”) permits the Company to borrow at interest rates based upon a margin above LIBOR, which margin varies with the ratio of total funded debt to EBITDA, as defined in the Facility.  These interest rates also vary as LIBOR varies.  The Company pays a commitment fee on the unused amount of the Facility, which also varies with the ratio of total debt to EBITDA as defined in the Facility.

The Notes, the Term Loan and the Facility require the Company to meet specified financial ratios and to satisfy certain financial condition tests.  The Company was in compliance with all debt covenants as of June 27, 2009.

In August, 2007 the Company entered into an interest rate swap agreement to manage fluctuations in cash flows resulting from interest rate risk.  (See also Note 15 of Notes to Condensed Consolidated Financial Statements.)

As of June 27, 2009, the Company’s $115.0 million, 2.75% convertible senior subordinated debt is convertible as the closing price of the Company’s common stock exceeded the contingent conversion share price for the specified amount of time.  As a result, bondholders that exercise their right to convert the notes will receive up to the principal amount of the notes in cash, with the balance of the conversion obligation, if any, to be satisfied in shares of the Company’s common stock or cash, at the Company’s discretion.  Effective on April 17, 2009, the conversion rate of the company’s convertible senior subordinated debt (“convertible debt”) was adjusted pursuant to the terms of the indenture.  The adjustment is required as the cumulative dividends paid to shareholders since the convertible debt was issued reached the threshold defined in the indenture.  The conversion rate as of April 17, 2009 is 39.5107 share of common stock for each $1,000 principal amount of convertible debt.  No notes have been converted into cash or shares of common stock as of June 27, 2009.   However, subsequent to quarter end, a portion of the convertible senior subordinated debt was converted by the bondholders.  See Note 17 of Notes to the Condensed Consolidated Financial Statements.

The estimated fair value of the convertible senior subordinated debt at June 27, 2009 was approximately $183.1 million and the carrying value was $115.0 million.  The estimated fair value was determined using Level 2 inputs as described in Note 16 of Notes to the Condensed Consolidated Financial Statement.

 
12
 

As of the beginning of fiscal 2009, the Company adopted FSP APB 14-1, “Accounting for Convertible Debt Instruments that May Be Settled in Cash Upon Conversion Including Partial Cash Settlement”. The adoption of APB 14-1 required an adjustment of convertible debt, equity,  and interest expense. (See also Note 2 of Notes to Condensed Consolidated Financial Statements.)

At June 27, 2009, additional notes payable of approximately $16.1 million were outstanding with a weighted average interest rate of 3.8%.

10. PENSION PLANS

The Company’s net periodic pension cost is comprised of the following components (in thousands):

   
Three Months Ending
    
Six Months Ending
  
   
June 27, 2009
    
June 28, 2008
    
June 27, 2009
    
June 28, 2008
  
Service cost
   $ 578     $ 1,003     $ 1,156     $ 2,006  
Interest cost
     1,592       1,478       3,184       2,956  
Expected return on plan assets
     (1,414 )     (1,393 )     (2,828 )     (2,786 )
Amortization of prior service cost
     49       53       98       106  
Amortization of net actuarial loss
     188       126       376       252  
Net periodic benefit expense
   $ 993     $ 1,267     $ 1,986     $ 2,534  

The estimated net actuarial loss and prior service cost for defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during the 2009 fiscal year is $0.8 million and $0.2 million, respectively.

In the second quarter of 2009 and 2008, the Company contributed $0.5 million and $0.3 million to defined benefit pension plans, respectively.  The Company expects to contribute an additional $12.0 million, for total contributions of $12.8 million in 2009. The Company contributed a total of $4.8 million in 2008.  The assumptions used in the valuation of the Company’s pension plans and in the target investment allocation have remained the same as those disclosed in the Company’s 2008 Annual Report on Form 10-K filed on February 25, 2009.

11. SHAREHOLDERS’ EQUITY

The Company recognized approximately $1.2 million and $1.1 million in share-based compensation expense for the three month period ended June 27, 2009 and June 28, 2008, respectively.  The Company recognized approximately $2.0 million in share-based compensation for the six months ended June 27, 2009 and June 28, 2008.  The total income tax benefit recognized relating to share-based compensation for the six months ended June 27, 2009 and June 28, 2008 was approximately $1.8 million and $1.3 million, respectively.  The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award recipient.  As of June 27, 2009, total unrecognized compensation cost related to share-based compensation awards was approximately $15.6 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 3.4 years.

The Company was authorized as of June 27, 2009 to deliver up to 5.0 million shares of common stock upon exercise of non-qualified stock options or incentive stock options, or upon grant or in payment of stock appreciation rights, and restricted stock.  Approximately 2.0 million shares were available for future grant or payment under the various plans at June 27, 2009.

On May 22, 2009, the Company completed the sale of 4,312,500 shares of common stock at a price of $36.25 per share to the public.  Net proceeds of approximately $150.5 million were received by the Company.

During the six months ended June 28, 2008, the Company repurchased 110,000 shares at a total cost of $4.2 million.  There were no shares repurchased in 2009.

Share-based Incentive Awards

 
13
 

The Company uses several forms of share-based incentive awards, including non-qualified stock options, incentive stock options and stock appreciation rights (“SARs”).  All grants are made at prices equal to the fair market value of the stock on the grant dates, and expire ten years from the grant date. The Company values restricted stock awards at the closing market value of its common stock on the date of grant and restrictions generally lapse three years after the date of grant.

The majority of the Company’s annual share-based incentive awards are made in the fiscal second quarter.  The per share weighted average fair value of share-based incentive awards granted in the May 2009 annual grant was $15.28.  The fair value of the awards is estimated on the date of grant using the Black-Scholes pricing model and the following assumptions:  risk-free interest rate of 2.6%; expected dividend yield of 1.5%; expected volatility of 36.8% and an estimated life of 7.0 years.

A summary of share-based awards (options and SARs) as of June 27, 2009 follows below.  Forfeitures of share-based awards were immaterial.

   
Shares
    
Wtd. Avg. Exercise Price
    
Wtd. Avg. Remaining Contractual Term (years)
    
Aggregate Intrinsic Value (in millions)
  
Number of shares:
                        
Outstanding
     1,804,875     $ 37.16       7.4     $ 9.0  
Exercisable
     773,842     $ 30.91       5.7     $ 8.2  

Restricted Stock

As of June 27, 2009, the Company had 109,450 shares of restricted stock outstanding with a weighted average price of $43.99 and a weighted average life of 2.2 years. There were 39,550 shares of restricted stock granted in the six months ended June 27, 2009.  The Company values restricted stock awards at the closing market value of its common stock on the date of grant and restrictions generally lapse three years after the date of the grant. In the first six months of 2009, 48,200 shares of restricted stock vested.

12. INCOME TAXES

The effective tax rate for the three months ended June 27, 2009 was 28.0% versus 35.3% in the prior year period.   The decrease in the effective tax rate results primarily from the global distribution of taxable income.

As of June 27, 2009 and December 27, 2008, respectively, the Company had approximately $8.2 million and $7.1 million of unrecognized tax benefits, $4.6 million and $3.5 million of which would affect its effective tax rate if recognized.  The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions.  Federal tax returns from 2005 through 2007 and various state tax returns from 2002 through 2007 remain subject to income tax examinations by tax authorities.

13. EARNINGS PER SHARE (EPS)

The numerator for the calculation of basic and diluted earnings per share is net income attributable to Regal Beloit Corporation.  The denominator is computed as follows (in thousands):

   
Three Months Ending
    
Six Months Ending
  
   
June 27, 2009
    
June 28, 2008
    
June 27, 2009
    
June 28, 2008
  
Denominator for basic EPS - weighted average
     33,256       31,306       32,357       31,311  
Effect of dilutive securities
     1,849       2,220       1,493       2,010  
Denominator for diluted EPS
     35,105       33,526       33,850       33,321  

The “Effect of dilutive securities” represents the dilution impact of equity awards and the convertible senior subordinated debt (see Note 9 of Notes to Condensed Consolidated Financial Statements).  The dilutive effect of the Convertible Notes was approximately 1.6 million shares and 1.8 million shares for the three months ended June 27, 2009 and June 28, 2008,

 
14
 

respectively. The dilutive effect of the Convertible Notes was approximately 1.2 million shares and 2.0 million shares for the six months ended June 27, 2009 and June 28, 2008, respectively.

Options for common shares where the exercise price was above the market price at June 27, 2009, totaling approximately 1.1 million shares have been excluded from the calculation of the effect of dilutive securities as the effect of such options is anti-dilutive.  There were approximately 0.4 million anti-dilutive option shares outstanding at June 28, 2008.

14. CONTINGENCIES

The Company is, from time to time, party to litigation that arises in the normal course of its business operations, including product warranty and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters.  The Company’s products are used in a variety of industrial, commercial and residential applications that subject us to claims that the use of our products is alleged to have resulted in injury or other damage. The Company accrues for anticipated costs in defending against such lawsuits in amounts that we believe are adequate, and the Company does not believe that the outcome of any such lawsuit will have a material effect on the Company’s financial position or its results of operations.

The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience.

15. DERIVATIVE INSTRUMENTS