Regal Rexnord - 10-Q quarterly report FY

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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:

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 March 2, 2010.

(In Thousands of Dollars, Except Shares Outstanding, Dividends Declared and Per Share Data)

(In Thousands of Dollars, Except per Shares Outstanding, Dividends Declared and Per Share Data)

(In Thousands of Dollars)

The accompanying (a) condensed consolidated balance sheet as of January 2, 2010, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of April 3, 2010, 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 2009 Annual Report on Form 10-K filed on March 2, 2010.

Recent accounting guidance changed the consolidation rules as they relate to variable interest entities (“VIE’s”).  The guidance changed the model related to consolidating a VIE, and defines the assessment methodology for determining VIE status.  The guidance was adopted by the Company as required at the beginning of fiscal 2010, and did not have an effect on the Company’s consolidated financial statements.

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 months ended April 3, 2010 are not necessarily indicative of the results that may be expected for the entire fiscal year ending January 1, 2011.

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

Cost for approximately 54% 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:

Property, plant and equipment by major classification was as follows:

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 material.

On April 6, 2010, the Company acquired CMG Engineering Group Pty, Ltd. (“CMG”) headquartered in Melbourne, Australia.  CMG manufactures and distributes fractional horsepower industrial motors, blower systems, and industrial metal products with operations in Australia, New Zealand, South Africa, Malaysia, Singapore, the United Kingdom, and the Middle East.  The purchase price was approximately $85.9 million, including $74.7 million in cash, approximately $5.1 million in assumed liabilities and 100,000 shares of Company stock.

Investments are generally short term in duration and are classified as trading securities, which are reported at fair value with gains and losses, which were insignificant for all periods presented, included in earnings.  As of April 3, 2010 and January 2, 2010, the Company had $147.1 million and $117.6 million respectively, of trading securities recorded at fair value (Level 2) (see Note 16 of the Condensed Consolidated Financial Statements for description of the fair value hierarchy).

5.   COMPREHENSIVE INCOME

The Company's consolidated comprehensive income for the three months ended April 3, 2010 and March 28, 2009, respectively, was as follows (in thousands):

The amount of comprehensive income attributable to noncontrolling interests was $2.1 million and $2.6 million for the three months ended April 3, 2010 and March 28, 2009, respectively.

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:

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 months ended April 3, 2010 and March 28, 2009 (in thousands):

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

As required, 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.

At April 3, 2010, all of the Company’s goodwill is attributable to the Electrical Segment and 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):

Intangible assets consisted of the following (in thousands):

Amortization expense recorded for the three months ended April 3, 2010 and March 28, 2009 was $4.4 million and $4.2 million, respectively.

The Company’s indebtedness as of April 3, 2010 and January 2, 2010 was as follows (in thousands):

At April 3, 2010, the Company has $250.0 million of Senior Notes (the “Notes”) outstanding.  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.

The Company also has 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 April 3, 2010, the interest rate of 1.2% 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 April 3, 2010.

The Company has entered into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk.  (See also Note 15 of Notes to Condensed Consolidated Financial Statements.)

The estimated fair value of the Convertible Notes at April 3, 2010 was approximately $91.9 million and the carrying value was $39.2 million.  The estimated fair value was determined using Level 2 inputs as described in Note 16 of Notes to the Condensed Consolidated Financial Statement.

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 2010 fiscal year is $2.2 million and $0.2 million, respectively.

In the first quarter of 2010 and 2009, the Company contributed $0.5 million and $0.3 million to defined benefit pension plans, respectively.  The Company expects to contribute an additional $1.0 million, for total contributions of $1.5 million in 2010.  The Company contributed a total of $10.1 million in 2009.  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 2009 Annual Report on Form 10-K filed on March 2, 2010.

The Company recognized approximately $1.4 million and $0.8 million in share-based compensation expense for the three month period ended April 3, 2010 and March 28, 2009, respectively.  The total excess income tax benefit recognized relating to share-based compensation for the three months ended April 3, 2010 and March 28, 2009 was approximately $0.7 million and $1.7 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 April 3, 2010, total unrecognized compensation cost related to share-based compensation awards was approximately $12.6 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 2.8 years.

The Company was authorized as of April 3, 2010 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 April 3, 2010.

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 $150.4 million were received by the Company.

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.

A summary of share-based awards (options and SARs) as of April 3, 2010 follows below.  Forfeitures of share-based awards were immaterial.

As of April 3, 2010, the Company had 100,450 shares of restricted stock outstanding with a weighted average grant date fair value of $43.00 and a weighted average life of 1.8 years.  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 three months of 2010 there were 21,000 shares of restricted stock vested.

The effective tax rate for the three months ended April 3, 2010 was 31.7% versus 34.1% in the prior year period.  The decrease in the effective rate is driven by changes in the global distribution of income.

As of April 3, 2010 and January 2, 2010, the Company had approximately $6.6 million of unrecognized tax benefits, all 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 2006 through 2009 and various state tax returns remain subject to income tax examinations by tax authorities.

On July 30, 2009, we filed a response and counterclaims to an action filed by Nordyne, Inc. (“Nordyne”) in the U.S. District Court for the Eastern District of Missouri in which action Nordyne is seeking a judgment declaring that neither Nordyne’s G7 furnace systems nor its iQ Drive 23-seer air conditioning systems infringe on our ECM (electronically commutated motor) systems patents (U.S. Patent No. 5,592,058) (“the ‘058 Patent”) and/or that the ‘058 Patent is invalid.  In our response and counterclaims against Nordyne we are seeking a judgment that the ‘058 Patent is valid and that Nordyne has, in fact, infringed and continues to infringe the ‘058 Patent by making, using, offering for sale and selling it G7 furnace systems and iQ Drive 23-seer air conditioning systems.  We have also requested the U.S. District Court to enjoin Nordyne and all persons working in concert with Nordyne from further infringement of the ‘058 Patent and to award us compensatory and other damages caused by such infringement.  We intend to defend our intellectual property vigorously against the claims asserted by Nordyne and against any infringement by Nordyne or any other person.  We do not currently believe that the litigation will have a material effect on the Company’s financial position or its results of operations.

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 is exposed to certain risks relating to its ongoing business operations.  The primary risks managed by using derivative instruments are commodity price risk, currency exchange, and interest rate risk.  Forward contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company’s manufacturing process.  Forward contracts on certain currencies are entered into to manage forecasted cash flows in certain foreign currencies.  Interest rate swaps are entered into to manage interest rate risk associated with the Company’s floating rate borrowings.

The Company must recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position.  Accordingly, the Company designates commodity forward contracts as cash flow hedges of forecasted purchases of commodities, currency forward contracts as cash flow hedges of forecasted foreign currency cash flows and interest rate swaps as cash flow hedges of forecasted LIBOR-based interest payments.  There were no significant collateral deposits on derivative financial instruments as of April 3, 2010.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income or loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  Gains and losses on the derivative representing either hedge ineffectiveness or changes in market value of derivatives not designated as hedges are recognized in current earnings.

At April 3, 2010, the Company had an additional $0.9 million, net of tax, of derivative gains on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings.  At March 28, 2009, the Company had an additional ($14.8) million, net of tax, of derivative losses on closed hedge instruments in AOCI that was realized in earnings when the hedged items impacted earnings.

As of April 3, 2010, the Company had outstanding the following commodity forward contracts (with maturities extending through February 2011) to hedge forecasted purchases of commodities (in millions):

As of April 3, 2010, the Company had outstanding the following currency forward contracts (with maturities extending through December 2011) to hedge forecasted foreign currency cash flows (in millions):

As of April 3, 2010, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swaps was $250.0 million (with maturities extending to August 2017).

Fair values of derivative instruments as of April 3, 2010 and January 2, 2010 were (in millions):

The effect of derivative instruments on the condensed consolidated statements of equity and earnings for the three months ended April 3, 2010 and March 28, 2009, was (in millions):

The ineffective portion of hedging instruments recognized during the three months ended April 3, 2010 was immaterial.

The net AOCI balance of ($12.9) million loss at April 3, 2010 includes ($2.7) million of net current deferred losses expected to be realized in the next twelve months.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  The inputs used to measure fair value are classified into the following hierarchy:

The Company uses the best available information in measuring fair value.  Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of April 3, 2010 and January 2, 2010 (in millions):

As of April 3, 2010, several holders of the Company’s convertible senior subordinated debt exercised their conversion right.  The conversion notice for an additional $38.7 million was received prior to quarter end, however, this settlement occurred subsequent to quarter end.  The Company paid cash to redeem the par value of the debt and has elected to pay the conversion premium in shares of common stock.  The conversion premium for the $38.7 million of redemptions settled totaled 906,736 shares of Company stock.  The current diluted EPS calculation includes an amount estimated for the dilutive effect of the Convertible Notes as disclosed in Note 13 of Notes to Condensed Consolidated Financial Statements.

On April 6, 2010, the Company acquired CMG Engineering Group Pty, Ltd. (“CMG”) headquartered in Melbourne, Australia.  CMG manufactures and distributes fractional horsepower industrial motors, blower systems, and industrial metal products with operations in Australia, New Zealand, South Africa, Malaysia, Singapore, the United Kingdom, and the Middle East.  The purchase price was approximately $85.9 million, including $74.7 million in cash, approximately $5.1 million in assumed liabilities and 100,000 shares of Company stock.

The global macro economic environment has continued to improve in the first quarter of 2010.  Sales of high efficiency products, particularly for HVAC and commercial refrigeration end markets, which are supported by the net economic impact to the end user and, in certain cases, are supported by tax credits and other subsidies continued to show strong growth rates.  During the first quarter, we also benefited from the absorption benefits of higher production volumes and we continued to reduce manufacturing and operating expenses to improve our profitability.

Net sales for the three months ended April 3, 2010 increased 14.4% to $507.3 million from $443.3 million in the comparable period of 2009.

Net income attributable to Regal Beloit Corporation increased 195.3% to $37.8 million for the three months ended April 3, 2010 as compared to $12.8 million in the comparable period last year.  Diluted earnings per share increased 151.3% to $0.98 for the three months ended April 3, 2010 as compared to $0.39 for the comparable period of 2009.

Worldwide sales for the three months ended April 3, 2010 were $507.3 million, a 14.4% increase over the $443.3 million reported for the three months ended March 28, 2009.

In the Electrical segment sales increased 16.8% with sales for the residential HVAC motor business impacted by the higher efficiency product mix, and low prior year comparables resulting in a 32.9% increase during 2010 as compared to the first quarter 2009.

Driven by improving end markets, commercial and industrial motor sales in North America for the three months ended April 3, 2010 increased 9.8% over sales for the three months ended March 28, 2009.  Global generator sales however, decreased 9.3% for the three months ended April 3, 2010 as compared to the prior year.

Sales in the Mechanical segment decreased 3.5% from the prior year period as a result of the slower recovery in later cycle industrial products.

From a geographic perspective, Asia-based sales increased 27.3% as compared to 2009.  In total, sales to regions outside of the United States were 27.1% of total sales for the three months ended April 3, 2010 as compared to 26.7% in 2009.  The impact of foreign currency exchange rates increased total sales by 1.6% for the three months ended April 3, 2010 as compared to the prior year period.  Sales of high efficiency products were 17.7% of total sales in the three months ended April 3, 2010 versus 12.9% in the prior year period.

Worldwide sales for the three months ended March 28, 2009 were $443.3 million, a 17.4% decrease over the $536.3 million reported for the three months ended March 29, 2008.  First quarter 2009 sales included $29.7 million of incremental sales from the businesses acquired in 2008 and the CPT acquisition in January 2009.

In the Electrical segment, sales decreased 17.4% including the impact of the acquisitions noted above.  Exclusive of the acquired businesses, Electrical segment sales were down 23.7%. Sales for the residential HVAC motor business were negatively impacted by the economic slowdown and decreased 22.0% versus 2008.  Sales of commercial and industrial motors in North America decreased approximately 23.0% for the first quarter of 2009, while sales of power generation products decreased 12.0% for the same period.

Sales in the Mechanical segment decreased 17.0% from the prior year period.

From a geographic perspective, Asia-based sales decreased 24.2% as compared to 2008.  In total, sales to regions outside of the United States were 26.7% of total sales for 2009 in comparison to 25.6% for 2008.  Sales of high efficiency product were 12.9% of total sales in the three months ended March 28, 2009 versus 12.2% in the prior year.

The gross profit margin for the three months ended April 3, 2010 was 25.8% as compared to 20.4% reported for 2009.  The gross profit margin for the Electrical segment was 25.6% for the three months ended April 3, 2010 versus 19.6% in the prior year.  Electrical segment margins improved due to a mix change toward higher efficiency products, cost reduction efforts, including the benefit from recent plant consolidations, and the absorption benefits of higher production volumes.  The Mechanical segment gross margin was 27.7% for the three months ended April 3, 2010 versus 26.9% in the prior year.  The Mechanical segment gross margin improvements were driven primarily by cost reduction efforts.

The gross profit margin for the three months ended March 28, 2009 was 20.4% as compared to the 22.8% reported for 2008. Higher material costs had a significant impact on 2008 partially offset by the contribution from new products, productivity efforts, pricing actions, and product mix.  The raw material cost increases resulted primarily from increases in the cost of copper and steel.  The gross profit margin for the Electrical segment reflected these impacts and decreased to 19.6% from 21.9% in 2008. Mechanical segment gross profit margin decreased to 26.9% in 2009 from 29.1% in the prior year.

Operating expenses were $68.2 million (13.4% of net sales) in the three months ended April 3, 2010 versus $62.4 million (14.1% of net sales) in 2009.  Higher sales volumes increased variable costs, and incremental spending on acquisition related costs raised operating costs in 2010.  Electrical segment operating expenses were 13.3% of net sales for the three months ended April 3, 2010 versus 14.0% in the prior year.   Mechanical segment operating expenses were 14.9% of net sales in 2010 and 14.8% in 2009.

Operating expenses were $62.4 million (14.1% of net sales) in the three months ended March 28, 2009 versus $64.5 million (12.0% of sales) in 2007. Electrical segment operating expenses were 14.0% of sales in 2009 and 11.9% of sales in 2008.  Mechanical operating expenses as a percent of sales increased to 14.8% from 13.0% in 2008.

Income from operations was $62.8 million for the three months ended April 3, 2010 and $28.2 million in the prior year.  As a percentage of sales, income from operations was 12.4% in 2010 versus 6.4% in 2009.  Income from operations improved, driven by a mix toward higher efficiency products, cost reduction efforts, including the benefit from recent plant consolidations, and the absorption benefits of higher production volumes.  Electrical segment income from operations was 12.3% of net sales in 2010 versus 5.6% in 2009.  The Mechanical segment income from operations was 12.8% of net sales for 2010 versus 12.1% of net sales in 2009.

Income from operations was $28.2 million versus $57.6 million in the comparable period of 2008.  As a percent of sales, income from operations was 6.4% for the three months ended March 28, 2009 versus 10.7% in the comparable period of 2007.  As a percent of sales, Electrical segment operating income decreased to 5.6% in 2009 from 10.0% in 2008. This decrease reflected lower operating profit margins from the acquired businesses, and significantly increased raw material costs partially offset by contributions from new products, pricing actions, and productivity. As a percent of sales, Mechanical segment operating income decreased to 12.1% in 2009 from 16.1% in 2008.

Net interest expense for the three months ended April 3, 2010 was $4.4 million versus $7.0 million for the three months ended March 28, 2009.  During 2010, the Company’s net interest expense decreased driven by lower average amounts of debt outstanding, a $1.1 million decrease in non-cash convertible debt financing expense, and higher interest income.

Net interest expense was $7.0 million versus $8.0 million in the comparable period of 2008.  The decrease is driven by lower interest rates in 2009 versus the comparable period of 2008.

The effective tax rate for the three months ended April 3, 2010 was 31.7% compared to 34.1% in the prior year period.  The decrease in the effective tax rate is driven by changes in the global distribution of income.

The effective tax rate for the three months ended March 28, 2009 was 34.1% versus 35.4% in the prior year period.  The decrease in the effective tax rate results from the global distribution of income.

Net Income Attributable to Regal Beloit Corporation for the three months ended April 3, 2010 was $37.8 million, an increase of 195.3% versus the $12.8 million reported in 2009.  Fully diluted earnings per share was $0.98 as compared to $0.39 reported for the three months ended March 28, 2009.  The average number of diluted shares was 38,622,314 during the three months ended April 3, 2010 as compared to 32,594,802 during the three months ended March 28, 2009.

Net Income Attributable to Regal Beloit Corporation for the three months ended March 28, 2009 was $12.8 million, a decrease of 59.3% versus the $31.4 million reported in the comparable period of 2008.  Fully diluted earnings per share was $0.39 as compared to $0.95 per share reported in 2008.  The average number of diluted shares was 32,594,802 during the three months ended March 28, 2009 as compared to 33,117,034 during the comparable period of 2008.

Our principal source of liquidity is operating cash flow which we target to equal or exceed our net income.  In addition to operating income, other significant factors affecting our liquidity management include: working capital levels, capital expenditures, dividends, acquisitions, availability of debt financing and the ability to attract long-term capital at acceptable terms.

Distress and volatility in financial markets has created increased levels of uncertainty regarding available debt and equity capital.  We have assessed our liquidity and continue to monitor the impact of the broader volatility on our business including vendors and customers.  We have determined that there has not been a significant impact on our financial position, results of operations, or liquidity as of April 3, 2010.

Our working capital was $679.4 million at April 3, 2010, an increase of 1.4% from $670.3 million at year-end 2009.  At April 3, 2010 our current ratio, the ratio of our current assets to current liabilities, was 2.8:1 versus 3.2:1 at the previous year-end.  The decrease in our current ratio is driven by the reclassification of our Convertible Notes from Long-Term Debt to Current Maturities of Debt due to the exercise of conversion rights by bondholders (See also Note 9 of Notes to Condensed Consolidated Financial Statements).

Cash flow provided by operating activities (“operating cash flow”) was $44.4 million in 2010, a $25.8 million increase from 2009.   The increase was driven by a $25.9 million increase in net income.

Cash flow used in investing activities was ($40.3) million in 2010, $31.0 million more than in 2009 driven by the net purchase of investment securities of $29.1 million. Capital spending increased to $11.2 million in 2010 from $8.1 million a year earlier.

Cash flow used in financing activities was ($8.7) million in 2010 compared to cash flow provided of $8.0 million in 2009.  The $16.7 million change is driven by the repayment of $4.6 million in total debt in 2010 versus the net borrowing of $10.8 million in the comparable period of 2009.

At April 3, 2010, the Company had $250.0 million of Senior notes (“the Notes”) outstanding.  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, deprecation, 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.

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

The Company has 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 under the Term Loan generally bear interest at a variable rate equal to (i) a margin over the LIBOR, which margin varies depending on whether certain criteria are satisfied, or (ii) the alternate base rate as defined in the agreement.  At April 3, 2010, the interest rate of 1.2% was based on a margin over LIBOR.

The Notes, the Term Loan and the Facility require us to meet specified financial ratios and to satisfy certain financial condition tests.  We were in compliance with all debt covenants as of April 3, 2010.

The Company periodically enters into commodity futures and options hedging transactions to reduce the impact of changing prices for certain commodities, such as copper and aluminum.  Contract terms of commodity hedge instruments generally mirror those of the hedged item, providing a high degree of risk reduction and correlation.

We are also exposed to foreign currency risks that arise from normal business operations.  These risks include the translation of local currency balances of foreign subsidiaries, intercompany loans with foreign subsidiaries and transactions denominated in foreign currencies.  Our objective is to minimize our exposure to these risks through a combination of normal operating activities and the utilization of foreign currency contracts to manage our exposure on the transactions denominated in currencies other than the applicable functional currency.  Contracts are executed with creditworthy banks and are denominated in currencies of major industrial countries.  It is our policy not to enter into derivative financial instruments for speculative purposes.  We do not hedge our exposure to the translation of reported results of foreign subsidiaries from local currency to United States dollars.

All derivatives are recorded on the balance sheet at fair value and are accounted for as cash flow hedges, changes in fair value are recorded in accumulated other comprehensive income (loss) in each accounting period.  An ineffective portion of the hedge’s change in fair value, if any, is recorded in earnings in the period of change.  The impact due to ineffectiveness was immaterial for all periods included in this report.

Items 4 and 5 are inapplicable and have been omitted.

On July 30, 2009, we filed a response and counterclaims to an action filed by Nordyne, Inc. (“Nordyne”) in the U.S. District Court for the Eastern District of Missouri in which action Nordyne is seeking a judgment declaring that neither Nordyne’s G7 furnace systems nor its iQ Drive 23-seer air conditioning systems infringe on our ECM (electronically commutated motor) systems patents (U.S. Patent No. 5,592,058) (“the ‘058 Patent”) and/or that the ‘058 Patent is invalid.  In our response and counterclaims against Nordyne we are seeking a judgment that the ‘058 Patent is valid and that Nordyne has, in fact, infringed and continues to infringe the ‘058 Patent by making, using, offering for sale and selling it G7 furnace systems and iQ Drive 23-seer air conditioning systems.  We have also requested the U.S. District Court to enjoin Nordyne and all persons working in concert with Nordyne from further infringement of the ‘058 Patent and to award us compensatory and other damages caused by such infringement.  We intend to defend our intellectual property vigorously against the claims asserted by Nordyne and against any infringement by Nordyne or any other person.  We do not currently believe that the litigation will have a material effect on the Company’s financial position or its results of operations.

The Company is, from time to time, party to litigation that arises in the normal course of our 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.

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.