ITEM 1. BUSINESS
General Development of Business - ------------------------------- Regal-Beloit Corporation is a Wisconsin corporation founded in 1955. The Company's initial business was the production of special metalworking taps. Through 34 acquisitions and internal growth, the Company has become a prominent manufacturer of a diversified line of mechanical products to control motion and torque and electrical products such as motors and generators.
The Company's mechanical products are manufactured by its Mechanical Group and include standard and custom worm gear, bevel gear, helical gear, and concentric shaft gearboxes; marine and high-performance after-market automotive transmissions; custom gearing; gear motors; and manual valve actuators. The Group also manufactures perishable, high speed steel, rotary cutting tools, which products are less than 10% of the Company's net sales. Mechanical Group products are sold to distributors, original equipment manufacturers and end users across many industry segments.
Typical applications for the Company's mechanical products include material handling systems such as conveyors, palletizers and packaging equipment; off-highway vehicular equipment such as street pavers, graders, airport/fire/crash/rescue equipment; farm implements; center pivot irrigation systems; gas and liquid pipeline transmission systems; civic water and waste treatment facilities; open-pit mining; paper making machinery; high-performance, after-market automotive transmissions and ring/pinion sets; and transmissions for luxury inboard powered craft.
Effective March 26, 1997, the Company acquired 100% of the stock of Marathon Electric Manufacturing Corporation for approximately $279,000,000. Marathon Electric now comprises the Company's Electrical Group, which manufactures its electrical products including electric motors and generators. The Electrical Group produces and markets AC electric motors ranging in size from 1/12 horsepower to over 500 horsepower and electric generators ranging in size from 5 kilowatts through 2300 kilowatts. These products are also sold to distributors, original equipment manufacturers and end users across many industry segments.
Typical applications for the Company's electrical products include: 1) for electric motors: air movement such as heating, ventilating, air conditioning and compressors; fluid movement such as pumping; woodworking; commercial laundry; process industries; variable frequency drives; and floor care; and 2) for electric generators: prime and standby power applications including buildings such as telecommunication, commercial, industrial, hospital and school; marine; agriculture; windpower; military; and transport refrigeration.
Regal-Beloit believes its consistent ability to provide products on a shorter delivery schedule than other manufacturers gives it a competitive selling advantage and that its extensive use of modern, up-to-date equipment which is best suited for the job, along with its continued product redesign and effective plant layout, often gives it a competitive cost advantage in its product offering.
Marketing and Sales - ------------------- The Company's products are sold to distributors, original equipment manufacturers and end users. Both the Mechanical Group and the Electrical Group have their own organization of field sales employees and manufacturers' representatives.
Export sales accounted for approximately 7% of the Company's sales in 1997 and 3% in each of 1996 and 1995. Additionally, 4%, 7%, and 6% of Company sales were manufactured and sold outside the United States in 1997, 1996, and 1995, respectively. No material part of the Company's business is dependent upon a single customer. In fiscal 1997, 1996, and 1995, no single customer accounted for as much as 3% of Company sales. Although the Company's sales are predominantly not seasonal, they tend to vary with general economic conditions and with the rate of industrial production, and are affected by business climates in the many markets in which the Company sells. However, because the Company's products are sold to many different markets, the effects of weaker markets are frequently offset by strengths in other markets.
Working capital requirements to properly serve the Company's customers are generally typical of capital goods manufacturers. Accounts receivable and inventory are generally not seasonal or at unusual levels by industry standards.
Competition - ----------- Major domestic competitors in the mechanical motion control equipment industry include Emerson Electric, Reliance Electric, Winsmith, Falk, and Boston Gear. Major foreign competitors would include SEW Eurodrive, Flender, Sumitomo and Zahnrad Fabrik. Major domestic competitors for the Electrical Group include Baldor Electric, Emerson Electric, Reliance, Leeson, General Electric, Cummins, and Magnetek. Major foreign competitors include Siemens, Toshiba, Weg, Leroy Somer, and ABB.
Over the past several years, niche product market opportunities have become more prevalent due to changing market conditions. The Mechanical Group's markets have also been impacted by decisions of larger manufacturers not to compete in lower volume or specialized markets. Many captive producers have chosen, for economic reasons, to outsource their requirements to specialized manufacturers like Regal-Beloit's Mechanical Group, who can produce more cost effectively.
The Company has capitalized on this competitive climate by making acquisitions and increasing its manufacturing efficiencies. Some of these acquisitions have created new opportunities for the Company because the Company is now in new markets in which it was not previously involved. The Company has also continued to upgrade its manufacturing equipment and processes, including increasing its use of computer-aided manufacturing systems and redesigning products to take full advantage of the more productive equipment along with redoing plant layout to improve product flow. In practice, the Company's operating units have sought out specific niche markets concentrating on a wide diversity of customers and applications. Because of this approach, the Company is often not the largest supplier in any specific market. The Company believes it competes primarily on the basis of the promptness of delivery, price and quality.
For further segment information required by Item 101 of Regulation S-K, reference is made to Note 11 of Notes to Consolidated Financial Statements on page 14 of the Annual Report to Shareholders for the year ended December 31, 1997, and such information is incorporated herein by reference.
Manufacturing - ------------- Each of the Company's operating units conducts its manufacturing operations independently in one or more facilities. The Company regularly invests in high quality machinery and equipment and other improvements to and maintenance of its facilities. These capital expenditures typically meet or exceed the Company's depreciation levels, as the Company believes that such investments are essential to its long-term success.
The manufacturing operations of both the Mechanical Group and Electrical Group are highly integrated. Although raw materials and selected parts such as bearings and seals are purchased, this vertical integration permits the Company to produce most of its products' component parts when needed. The Company believes this results in lower production costs, greater manufacturing flexibility and higher product quality, as well as reducing the Company's reliance on outside suppliers.
Base materials for the Company's products consist primarily of: 1) steel in various types and sizes, bearings and weldments, 2) copper magnet wire and 3) castings made of grey iron or aluminum. The Company purchases its raw materials from many suppliers and is not dependent on any single supplier for any of its base materials.
Backlog - ------- As of December 31, 1997, the amount of the Company's Mechanical Group backlog was approximately $51,310,000 compared to approximately $44,460,000 on December 31, 1996. The Electrical Group backlog as of December 31, 1997 was $31,700,000. Average delivery time for orders of the Company's mechanical products (except for large, specially designed products) varies from three days to two months. The Company believes that virtually all of its backlog is shippable in 1998. The Company's business units have historically shipped the majority of its products in the month the order is received. Accordingly, since total backlog is less than 15% of the Company's annual sales, the Company believes that backlog is not a reliable indicator of the Company's future sales.
Patents, Trademarks and Licenses - -------------------------------- The Company owns a number of United States patents and foreign patents relating to its businesses. While the Company believes that its patents provide certain competitive advantages, the Company does not consider any one patent or group thereof essential to the business of either of its Groups or the Company as a whole. Regal-Beloit utilizes various registered and unregistered trademarks and the Company believes these trademarks are significant in the marketing of most of its products. However, the Company believes the successful manufacture and sale of its products generally depends more upon its technological, manufacturing and marketing skills. In addition, the Company believes its engineering, test and development capabilities are significant factors in the success of its business.
Employees - --------- As of December 31, 1997, the Company employed approximately 4,810 persons, of which approximately 27% are covered by collective bargaining agreements. The Company considers its employee relations to be very good.
Environmental Matters - --------------------- The Company is subject to Federal, State and local environmental regulations. The Company is currently involved with environmental proceedings related to certain of its facilities. Based on available information, it is believed that the outcome of these proceedings and future known
environmental compliance costs will not have a material adverse effect on the Company's financial position or results of operations.
ITEM 2.
ITEM 2. PROPERTIES
The Company's Mechanical Group currently operates 21 manufacturing and service/distribution facilities. Four are located in Illinois; two each are located in Indiana, South Carolina, South Dakota and Wisconsin; and one each located in California, Massachusetts, New York, North Carolina, Pennsylvania, Texas, Newbury (England), Neu Anspach (Germany) and Legnano (Italy). The Mechanical Group's present operating facilities contain a total of approximately 1,590,000 square feet of space of which approximately 46,700 square feet are leased.
The Electrical Group currently operates 10 manufacturing and warehousing facilities. Two each are located in Missouri and Ohio; and one each in Indiana, Pennsylvania, Texas, Wisconsin, Singapore, and Market Overton (England). The Electrical Group's present operating facilities contain a total of approximately 1,010,000 square feet of space of which approximately 130,000 square feet are leased.
The Company has its principal offices in Beloit, Wisconsin in an owned 24,000 square foot office building. The Company believes its equipment and facilities are well maintained and adequate for its present needs. The Company currently owns one additional vacant manufacturing facility with a total of 53,000 square feet that it intends to sell.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter ended December 31, 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Certain information required by Item 201 of Regulation S-K is set forth on page 4 and the inside back cover of the Annual Report to Shareholders for the year ended December 31, 1997, and such information is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Information required by Item 301 of Regulation S-K is set forth on page 4 of the Annual Report to Shareholders for the year ended December 31, 1997, and such information is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information required by Item 303 of Regulation S-K is set forth on pages 5 and 6 of the Annual Report to Shareholders for the year ended December 31, 1997, and such information is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
In the Annual Report to Shareholders for the year ended December 31, 1997, there are set forth on pages 7 through 15, financial statements meeting the requirements of Regulation S-X and information specified by Item 302 of Regulation S-K and such financial statements are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has had no disagreements with its accountants subject to disclosure by Item 304 of Regulation S-K nor has it had a change of accountants within the last two fiscal years.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 401 of Regulation S-K is set forth on pages 3 through 5 and 8 of the definitive proxy statement for the Annual Meeting of Shareholders to be held on April 21, 1998, a copy of which has been filed within 120 days following the close of the fiscal year, and such information is incorporated herein by reference.
The names, ages, and positions of all of the executive officers of the Company as of March 6, 1998, are listed below along with their business experience during the past five years. Officers are elected annually by the Board of Directors at the Meeting of Directors immediately following the Annual Meeting of Shareholders in April. There are no family relationships among these officers, nor any arrangements of understanding between any officer and any other persons pursuant to which the officer was selected.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 402 of Regulation S-K is set forth on pages 9 through 15 of the definitive proxy statement for the Annual Meeting of Shareholders to be held on April 21, 1998, a copy of which has been filed within 120 days following the close of the fiscal year, and such information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAEMENT
Information required pursuant to Item 403 of Regulation S-K is set forth on pages 3, 4, 5, and 8 of the definitive proxy statement for the Annual Meeting of Shareholders to be held on April 21, 1998, a copy of which has been filed within 120 days following the close of the fiscal year, and such information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required pursuant to Item 404 of Regulation S-K is set forth on page 7 of the definitive proxy statement for the Annual Meeting of Shareholders to be held on April 21, 1998, a copy of which has been filed within 120 days following the close of the fiscal year, and such information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE, EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Reference is made to the separate index to the Company's Consolidated Financial Statements and Schedule contained on Page 11 hereof.
3. EXHIBITS
Reference is made to the separate exhibit index contained on Pages 14-15 hereof.
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K by the Company during the quarter ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
REGAL-BELOIT CORPORATION
By: /s/ Kenneth F. Kaplan -------------------------------- Kenneth F. Kaplan Vice President, Chief Financial Officer and Secretary
March 6, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Regal-Beloit Corporation:
We have audited, in accordance with generally accepted auditing standards, the financial statements included in Regal-Beloit Corporation's Annual Report to Shareholders, incorporated by reference in this Form 10-K, and have issued our report thereon dated January 28, 1998. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index to financial statements is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP ------------------------ ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin, January 28, 1998
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Regal-Beloit Corporation:
As independent public accountants, we hereby consent to the incorporation of our reports, included and incorporated by reference in this Form 10-K, into Regal-Beloit Corporation's previously filed Registration Statements, File Nos. 33-25480, 33-25233, 33-82076 and 33-8934.
ARTHUR ANDERSEN LLP ------------------- ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin, March 11, 1998
SCHEDULE II
EXHIBITS INDEX
The following exhibits are required to be filed by Item 601 of Regulation S-K.