Regal Rexnord - 10-Q quarterly report FY

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___

Indicate the number of shares outstanding of each of the issuers' classes of common stock as of the latest practicable date.

See accompanying notes.

See accompanying notes.

See accompanying notes.
 
 

1. BASIS OF PRESENTATION

The condensed financial statements include the accounts of Regal-Beloit Corporation and its wholly owned subsidiaries and have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. All adjustments which management believes are necessary for a fair statement of the results for the interim periods presented have been reflected and are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested these statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K.

2. INVENTORIES

Cost for approximately 87% of the Company's inventory is determined using the last-in, first-out (LIFO) inventory valuation method. The approximate percentage distribution between major classes of inventories is as follows:
 

3. 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 ("Leeson"), a private company, for approximately $260,000,000 in cash. The results of operations and the assets and liabilities of Leeson are included in the performance and financial position of the Company on and after September 29, 2000.

The consolidated financial statements also incorporate the results of operations and the assets and liabilities of Thomson Technology Inc. ("TTI") after June 29, 2000, the date TTI was acquired by the Company.

4. COMPREHENSIVE INCOME

The Company's comprehensive income is solely impacted by the amount of the cumulative translation adjustment recorded to shareholders' equity. For the quarter ended June 30, 2001, the impact was $390,000 of income resulting in net comprehensive income of $5,674,000 for the quarter. The impact in the second quarter of 2000 was $468,000 of expense resulting in net comprehensive income of $8,997,000. In the first six months of 2001 the impact is an expense of $679,000 resulting in net comprehensive income of $10,447,000. The impact in the first six months of 2000 was $715,000 of expense resulting in net comprehensive income of $18,164,000.

5. BUSINESS SEGMENTS

The Company operates two strategic businesses that are reportable segments: the Mechanical Group and the Electrical Group.
 

6. BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS

On June 30, 2001, the Financial Accounting Standards Board finalized Statements of Financial Accounting Standards No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." Statement No. 141 requires all business combinations initiated after June 30, 2001 to use the purchase method of accounting. Under the requirements of Statement No. 142, intangible assets meeting specific criteria will be separately identified from goodwill acquired in future purchase method acquisitions and amortized over their individual useful lives. Also, the Company's existing goodwill at June 30, 2001 will no longer be amortized, effective January 1, 2002. This will eliminate approximately $9,400,000 of annual goodwill amortization. An assessment of fair value will be used to test for impairment of goodwill on an annual basis or when circumstances indicate a possible impairment. The Company does not anticipate any other significant impacts from adoption of Statement Nos. 141 and 142.

Item 2. Management's Discussion and Analysis of Financial

Condition and Results of Operations

RESULTS OF OPERATIONS

Net sales for the second quarter of 2001 were $171,946,000, 18.6% higher than net sales of $145,027,000 in the second quarter of 2000. Excluding sales from the Leeson Electric and Thomson Technology acquisitions made in 2000, second quarter 2001 sales were 12.6% below comparable 2000. For the six months ended June 30, 2001, net sales were $349,068,000, 20.7% greater than

$289,212,000 in the first half of 2000. Excluding the acquisitions, sales were 11.4% lower this year-to-date versus last. Electrical Group sales in the second quarter and six months of 2001 were up 47.0% and 49.7%, respectively, from the comparable periods of 2000, but excluding acquisitions were 8.5% and 7.7% lower, respectively. Mechanical Group sales were 17.9% and 15.9% below second quarter and six months 2000, respectively. The lower sales in both operating Groups were primarily the result of the continuing weakness in industrial manufacturing markets in the United States. (See Note 5 for business segment data.)

Gross profit for the Company was $42,829,000 in the second quarter of 2001, 12.5% higher than second quarter 2000, and was $87,980,000 in the first half of 2001, a 15.2% increase from comparable 2000. Gross profit margin decreased to 24.9% in the second quarter from 26.2% in

comparable 2000, and to 25.2% in this year's first half versus 26.4% last year. The decreases in margin were due primarily to lower sales, lower production levels and increased price competition.

Operating expenses of $28,095,000 in the second quarter and $56,086,000 in the first half were 41.5% and 39.9% higher than the comparable periods of 2000. Excluding acquisitions, however, operating expenses decreased 5.2% and 6.9% from last year, respectively, in the second quarter and first six months of 2001. As a percent of sales, however, operating expenses rose to 16.1% in the first half of 2001 from 13.9% in comparable 2000. This increase was due primarily to reduced 2001 sales volume resulting from weak demand in industrial markets.

Income from operations of the Company decreased 19.1% to $14,734,000 in the second quarter of 2001 from $18,213,000 in comparable 2000. For the first half of 2001, the decrease was 12.1% from a year previously. As a percent of sales, operating income margin decreased to 8.6% and 9.1% in the second quarter and first half of 2001, respectively, from 12.6% in both of these periods of 2000. These decreases resulted from the combination of the Company's lower gross profit margin and higher operating expenses as a percentage of net sales, both of which have been heavily impacted by the economic slowdown in the industrial economy.

Company interest expense in the second quarter was $5,692,000, compared to $2,362,000 a year previously. For the first half of 2001, interest expense was $12,816,000 versus $4,718,000 in 2000. The increase was due to the increased debt to acquire Leeson Electric in September 2000. Reduced interest rates due to Federal Reserve actions and repayment of $15,000,000 of long-term debt in the second quarter resulted in a $1,432,000 reduction in interest expense from the first quarter of 2001. The Company's effective tax rate for the second quarter and first half of 2001 was 41.7% and 41.9%, respectively, as compared to 40.5% and 40.4% for the same periods of 2000, due primarily to the impact on effective tax rates of non-deductible goodwill expense.

Net income earned in 2001 was $5,284,000 in the second quarter and $11,126,000 in the first half, decreases of 44.2% and 41.1%, respectively, from $9,465,000 and $18,879,000 of earnings in the comparable periods last year. Net income as a percent of sales was 3.1% and 3.2% in the second quarter and first half of 2001, respectively, as compared to 6.5% in both periods of 2000, for the reasons discussed above. Earnings per share (diluted) were $.25 in the second quarter and $.53 in the first six months of 2001, down from $.45 and $.90 in the respective periods a year ago.

LIQUIDITY AND CAPITAL RESOURCES

Working capital at June 30, 2001 was $179,329,000, 3.5% below $185,781,000 at December 31, 2000. The decrease was due primarily to lower inventory levels. Current ratio of 3.3:1 was unchanged from year-end 2000.

The Company's cash flow from operations was $21,422,000 in the second quarter of 2001 compared to $14,653,000 in 2000. Inventory reductions of approximately $9,000,000 in the second quarter accounted for the increased operating cash flow. Six months 2001 operating cash flow of $35,877,000 was 32% higher than $27,275,000 last year. After deducting cash used in investing activities and dividends from the operating cash flow, the Company had sufficient cash to repay $22,552,000 of long-term debt in the first six months of 2001 and make a small product line acquisition in January 2001. (See Note 3.) Outstanding commitments for future capital expenditures at June 30, 2001 were approximately $1,791,000.

Outstanding long-term debt at June 30, 2001 was $371,724,000, a decrease of $14,263,000 from March 31, 2001 and $21,786,000 from December 31, 2000.  Subsequent to the end of the second quarter, on July 20, 2001, the Company reduced its $450,000,000 long-term revolving credit facility to $400,000,000 (the "Facility").  Also subsequent to the quarter's end, on August 13, 2001, the Company and the participating banks amended the Facility. The amendment revised, effective June 29, 2001, certain financial and other covenants and increased the Company's interest rate by raising the margin over LIBOR the Company pays the banks. The Company was in compliance with the amended covenants as of June 30, 2001. At June 30, 2001, prior to the $50,000,000 Facility decrease, the Company had, after approximately $2,500,000 of standby letters of credit, $75,776,000 of available borrowing capacity. The Company paid an annualized interest rate of approximately 5.1% on its outstanding debt at the end of the second quarter of 2001. Management believes the Facility provides sufficient borrowing capacity for the Company to finance its existing operations for the foreseeable future.
 
 

CAUTIONARY STATEMENT

The following is a cautionary statement made under the Private Securities Litigation Reform Act of 1995: With the exception of historical facts, the statements contained in Item 2. of this Form 10-Q may be forward looking statements. Actual results may differ materially from those contemplated. Forward looking statements involve risks and uncertainties, including but not limited to, the following risks: 1) cyclical downturns affecting the markets for capital goods, 2) substantial increases in interest rates that impact the cost of the Company's outstanding debt, 3) the success of Management in increasing sales and maintaining or improving the operating margins of its businesses, 4) the availability of or material increases in the costs of select raw materials or parts, and 5) actions taken by competitors. Investors are directed to the Company's documents, such as its Annual Report on Form 10-K and Form 10-Q's filed with the Securities and Exchange Commission.
 
 

Item 4.  Submission of Matters to a Vote of Security Holders

(a)   The Annual Meeting of Shareholders of Regal-Beloit Corporation was held on April 18, 2001.

(b)   The terms of Directors James L. Packard, Henry W. Knueppel, Paul W. Jones,
        J. Reed Coleman, Frank E. Bauchiero and Stephen N. Graff were continued.
 
 

(c)    Matters voted on at the Annual Meeting and the results of each vote were as follows:

Item 6.   Exhibits and Reports on Form 8-K

There were no reports on Form 8-K filed during the quarter ended June 30, 2001.  Included as Exhibit 1, which is filed herein, is the First Amendment, as of June 29, 2001, to the Credit Agreement between the Company and various banks, dated as of September 29, 2000, filed previously as Exhibit 4.2 to the Company's Annual Report on Form 10-K dated March 16, 2001.
 
 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

DATE:   August 15, 2001