UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		for the quarterly period ended July 2, 2011

o		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.)

(Address of principal executive office)

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 þ NO o

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 o NO o

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 þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(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 o NO þ

     As of July 29, 2011, 38,684,888 shares of the registrant’s common stock, $.01 par value per share, were outstanding.

 

 

REGAL BELOIT CORPORATION

INDEX

		Page
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings			4
Condensed Consolidated Balance Sheets			5
Condensed Consolidated Statements of Equity			6
Condensed Consolidated Statements of Cash Flows			7
Notes to Condensed Consolidated Financial Statements			8
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3 - Quantitative and Qualitative Disclosures about Market Risk			23
Item 4 - Controls and Procedures			24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings			25
Item 1A - Risk Factors			25
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds			25
Item 6 - Exhibits			27
Signature			28
Index to Exhibits			29

CAUTIONARY STATEMENT

Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s expectations, beliefs, current assumptions and projections. When used in this Quarterly Report on Form 10-Q, words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “project” or “plan” or the negative thereof or similar words are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Those factors include, but are not limited to:

	•		actions taken by our competitors and our ability to effectively compete in the increasingly competitive global electric motor, power generation and mechanical motion control industries;
	•		our ability to develop new products based on technological innovation and the marketplace acceptance of new and existing products;
	•		fluctuations in commodity prices and raw material costs;
	•		our dependence on significant customers;
	•		issues and costs arising from the integration of acquired companies and businesses, including the timing and impact of purchase accounting adjustments;
	•		our dependence on key suppliers and the potential effects of supply disruptions;
	•		infringement of our intellectual property by third parties, challenges to our intellectual property, and claims of infringement by us of third party technologies;
	•		increases in our overall debt levels as a result of acquisitions or otherwise and our ability to repay principal and interest on our outstanding debt;
	•		product liability and other litigation, or the failure of our products to perform as anticipated, particularly in high volume applications;
	•		difficulties consummating the pending acquisition of the Electrical Products Company of A.O. Smith Corporation that may have a negative impact on our results of operations;
	•		unanticipated costs or expenses that could be incurred relating to product warranty matters;
	•		economic changes in global markets where we do business, such as reduced demand for the products we sell, currency exchange rates, inflation rates, interest rates, recession, foreign government policies and other external factors that we cannot control;
	•		unanticipated liabilities of acquired businesses;
	•		cyclical downturns affecting the global market for capital goods;
	•		difficulties associated with managing foreign operations; and
	•		other risks and uncertainties including but not limited to those described in “Risk Factors” in this Quarterly Report on Form 10-Q and from time to time in our reports filed with Securities and Exchange Commission.

Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report, and we undertake no obligation to update these statements to reflect subsequent events or circumstances. Additional information regarding these and other risks and factors is included in Item 1A — Risk Factors in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2011.

PART I — FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

REGAL BELOIT CORPORATION

(Dollars in Thousands, Except Cash Dividends Declared and Per Share Data)

		Three Months Ended								Six Months Ended
		July 2, 2011				July 3, 2010				July 2, 2011				July 3, 2010
Net Sales		$	681,785			$	584,181			$	1,344,440			$	1,091,499
Cost of Sales			531,116				440,677				1,028,960				817,080
Gross Profit			150,669				143,504				315,480				274,419
Operating Expenses			95,860				76,705				196,551				144,855
Income From Operations			54,809				66,799				118,929				129,564
Interest Expense			4,814				4,480				9,905				9,541
Interest Income			419				514				736				1,155
Income Before Taxes			50,414				62,833				109,760				121,178
Provision For Income Taxes			14,429				20,058				32,952				38,535
Net Income			35,985				42,775				76,808				82,643
Net Income Attributable to Noncontrolling Interests			1,655				1,055				3,641				3,161
Net Income Attributable to Regal Beloit Corporation		$	34,330			$	41,720			$	73,167			$	79,482
Earnings Per Share of Common Stock:
Basic		$	0.89			$	1.09			$	1.89			$	2.10
Assuming Dilution		$	0.88			$	1.07			$	1.87			$	2.05
Cash Dividends Declared		$	0.18			$	0.17			$	0.35			$	0.33
Weighted Average Number of Shares Outstanding:
Basic			38,667,034				38,310,371				38,646,873				37,878,189
Assuming Dilution			39,212,535				38,954,418				39,182,215				38,796,187

See accompanying Notes to Condensed Consolidated Financial Statements.

REGAL BELOIT CORPORATION

(Dollars in Thousands, Except Per Share Data)

		Unaudited
		July 2, 2011				January 1, 2011
ASSETS
Current Assets:
Cash and Cash Equivalents		$	275,348			$	174,531
Investments — Trading Securities			—				56,327
Trade Receivables, less Allowances of $10,646 in 2011 and $10,637 in 2010			410,565				331,017
Inventories			436,375				390,587
Prepaid Expenses and Other Current Assets			87,818				110,665
Deferred Income Tax Benefits			29,608				24,924
Total Current Assets			1,239,714				1,088,051
Net Property, Plant and Equipment			412,136				396,376
Goodwill			793,716				775,371
Intangible Assets, Net of Amortization			185,833				175,490
Other Noncurrent Assets			15,144				13,848
Total Assets		$	2,646,543			$	2,449,136
LIABILITIES AND EQUITY
Current Liabilities:
Accounts Payable		$	279,311			$	231,705
Dividends Payable			6,962				6,562
Accrued Compensation and Employee Benefits			68,976				63,842
Other Accrued Expenses			120,946				88,596
Current Maturities of Debt			14,282				8,637
Total Current Liabilities			490,477				399,342
Long-Term Debt			428,044				428,256
Deferred Income Taxes			98,704				92,858
Hedging Obligations			38,452				39,174
Pension and other Post Retirement Benefits			55,427				51,127
Other Noncurrent Liabilities			54,874				41,217
Commitments and Contingencies (see Note 13)
Equity:
Regal Beloit Corporation Shareholders’ Equity:
Common Stock, $.01 par value, 100,000,000 shares authorized, 38,684,713 shares issued in 2011, and 38,615,547 issued in 2010			387				386
Additional Paid-In Capital			543,206				535,807
Retained Earnings			887,104				827,467
Accumulated Other Comprehensive Income (Loss)			11,340				(1,700	)
Total Regal Beloit Corporation Shareholders’ Equity			1,442,037				1,361,960
Noncontrolling Interests			38,528				35,202
Total Equity			1,480,565				1,397,162
Total Liabilities and Equity		$	2,646,543			$	2,449,136

See accompanying Notes to Condensed Consolidated Financial Statements.

REGAL BELOIT CORPORATION

(Dollars in Thousands, Except Per Share Data)

		Regal Beloit Corporation Shareholders’ Equity
														Accumulated
		Common				Additional								Other
		Stock $.01				Paid-In				Retained				Comprehensive				Noncontrolling				Total
		Par Value				Capital				Earnings				Income (Loss)				Interests				Equity
Balance as of January 2, 2010		$	374			$	512,282			$	703,765			$	(48,597	)		$	12,244			$	1,180,068
Net Income			—				—				79,482				—				3,161				82,643
Dividends Declared ($.33 per share)			—				—				(12,553	)			—				—			$	(12,553	)
Issuance of 100,000 shares of Common Stock for Acquisition			1				6,106				—				—				—			$	6,107
Issuance of Common Stock for Conversion premium on Convertible Debt redemption			9				(9	)			—				—				—			$	—
Reversal of Unrecognized Tax Benefits Related to Convertible Debt			—				6,119				—				—				—			$	6,119
Noncontrolling Interests of Acquisitions			—				—				—				—				1,836			$	1,836
Stock Options Exercised, including income tax benefit and share cancellations			2				3,131				—				—				—			$	3,133
Share-based Compensation			—				3,065				—				—				—			$	3,065
Other Comprehensive Income (Loss) by Classification:
Currency Translation adjustments			—				—				—				(7,523	)			(12	)		$	(7,535	)
Hedging Activities, net of tax			—				—				—				(11,041	)			—			$	(11,041	)
Pension and Post Retirement Benefits, net of tax			—				—				—				811				—			$	811
Balance as of July 3, 2010		$	386			$	530,694			$	770,694			$	(66,350	)		$	17,229			$	1,252,653

		Regal Beloit Corporation Shareholders’ Equity
														Accumulated
		Common				Additional								Other
		Stock $.01				Paid-In				Retained				Comprehensive				Noncontrolling				Total
		Par Value				Capital				Earnings				Income (Loss)				Interests				Equity
Balance as of January 1, 2011		$	386			$	535,807			$	827,467			$	(1,700	)		$	35,202			$	1,397,162
Net Income			—				—				73,167				—				3,641				76,808
Dividends Declared ($.35 per share)			—				—				(13,530	)			—				—			$	(13,530	)
Stock Options Exercised, including income tax benefit and share cancellations			1				1,164				—				—				—			$	1,165
Share-based Compensation			—				6,235				—				—				—			$	6,235
Other Comprehensive Income (Loss) by Classification:
Currency Translation adjustments			—				—				—				18,910				(315	)		$	18,595
Hedging Activities, net of tax			—				—				—				(6,962	)			—			$	(6,962	)
Pension and Post Retirement Benefits, net of tax			—				—				—				1,092				—			$	1,092
Balance as of July 2, 2011		$	387			$	543,206			$	887,104			$	11,340			$	38,528			$	1,480,565

See accompanying Notes to Condensed Consolidated Financial Statements.

REGAL BELOIT CORPORATION

(Dollars in Thousands)

		Six Months Ended
		July 2, 2011				July 3, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	76,808			$	82,643
Adjustments to reconcile net income to net cash provided by operating activities (net of acquisitions):
Depreciation and amortization			43,626				35,899
Excess tax benefits from share-based compensation			(1,003	)			(1,411	)
Loss on disposition of property, net			488				1,368
Share-based compensation expense			6,235				3,065
Change in assets and liabilities			(16,578	)			(21,837	)
Net cash provided by operating activities			109,576				99,727
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment			(38,525	)			(18,232	)
Purchases of investment securities			—				(187,877	)
Sales of investment securities			55,998				131,529
Business acquisitions, net of cash acquired			(22,053	)			(75,863	)
Sale of property, plant and equipment			209				67
Net cash used in investing activities			(4,371	)			(150,376	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of convertible debt			—				(38,728	)
Proceeds from short-term borrowings			20,508				—
Repayments of short-term borrowings			(15,390	)			—
Net repayments of short-term borrowings			—				(8,733	)
Payments of long-term debt			(88	)			(103	)
Net repayments under revolving credit facility			—				(2,863	)
Dividends paid to shareholders			(13,130	)			(11,978	)
Proceeds from the exercise of stock options			1,756				2,989
Excess tax benefits from share-based compensation			1,003				1,411
Financing fees paid			(1,874	)			—
Net cash used in financing activities			(7,215	)			(58,005	)
EFFECT OF EXCHANGE RATES ON CASH			2,827				(1,266	)
Net increase (decrease) in cash and cash equivalents			100,817				(109,920	)
Cash and cash equivalents at beginning of period			174,531				262,422
Cash and cash equivalents at end of period		$	275,348			$	152,502

See accompanying Notes to Condensed Consolidated Financial Statements.

REGAL BELOIT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2011
(Unaudited)

1. BASIS OF PRESENTATION

The accompanying (a) condensed consolidated balance sheet of Regal Beloit Corporation (the “Company”) as of January 1, 2011, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of July 2, 2011, 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 2010 Annual Report on Form 10-K filed on March 2, 2011.

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 July 2, 2011 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2011.

The Company operates on a 52/53 week fiscal year ending on the Saturday closest to December 31.

2. OTHER FINANCIAL INFORMATION

Inventories

Cost for approximately 55% 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:

		July 2, 2011				January 1, 2011
Raw Material and Work in Process			34%				36%
Finished Goods and Purchased Parts			66%				64%

Property, Plant and Equipment

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

		July 2, 2011				January 1, 2011
Land and Improvements		$	67,438			$	45,909
Buildings and Improvements			143,192				141,128
Machinery and Equipment			545,374				524,172
Construction in Progress			26,927				26,644
Property, Plant and Equipment			782,931				737,853
Less: Accumulated Depreciation			(370,795	)			(341,477	)
Net Property, Plant and Equipment		$	412,136			$	396,376

3. ACQUISITIONS

The results of operations for acquired businesses are included in the Condensed Consolidated Financial Statements from the dates of acquisition.

On June 1, 2011, the Company acquired Australian Fan and Motor Company (“AFMC”) located in Melbourne, Australia. AFMC manufactures and distributes a wide range of direct drive blowers, fan decks, axial fans and sub fractional motors for sales in Australia and New Zealand. The preliminary purchase price of $5.7 million was paid in cash, net of acquired debt and cash. AFMC is reported as part of the Company’s Electrical segment.

On April 5, 2011, the Company acquired Ramu, Inc. (“Ramu”) located in Blacksburg, Virginia. Ramu is a motor and control technology company with a research and development team dedicated to the development of switched reluctance motor technology. The purchase price included $5.3 million paid in cash, net of acquired debt and cash and an additional amount should certain future performance expectations be met. At July 2, 2011, the Company has recorded a liability of $16.7 million for this deferred contingent purchase price. Ramu is reported as part of the Company’s Electrical segment.

On March 7, 2011, the Company acquired Hargil Dynamics Pty. Ltd. (“Hargil”) located in Sydney, Australia. Hargil is a distributor of mechanical power transmission components and solutions. Hargil is reported as part of the Company’s Mechanical segment.

On December 23, 2010, the Company acquired Unico, Inc. (“Unico”), located in Franksville, Wisconsin. Unico manufactures a full range of AC and DC drives, motor controllers and other accessories for most industrial and commercial applications. Unico has developed proprietary technology in the fields of oil and gas recovery technology, commercial HVAC technology, test stand automation and other applications. The purchase price of $107.3 million was paid in cash, net of acquired debt and cash. In addition to the cash paid, the Company agreed to pay an additional amount should certain performance thresholds be met. At July 2, 2011, the Company has a liability recorded of $9.2 million for this deferred contingent purchase price. Unico is reported as part of the Company’s Electrical segment.

On December 1, 2010, the Company acquired South Pacific Rewinders (“SPR”), located in Auckland, New Zealand. SPR operates as a motor rewinder and distributor in the Pacific region. SPR is reported as part of the Company’s Electrical segment.

On November 1, 2010, the Company acquired 55% of Elco Group B.V. (“Elco”), located in Milan, Italy. Elco manufactures and sells motors, fans and blowers and has manufacturing facilities in Italy, China and Brazil. The purchase price was $27.3 million, net of acquired debt and cash. The purchase price includes $4.6 million in cash, paid at closing, $5.6 million paid during the first three months of 2011, and $17.1 million which will be paid in three semi-annual payments ending in 2012. Elco is reported as part of the Company’s Electrical segment.

On September 1, 2010, the Company acquired Rotor B.V. (“Rotor”), located in Eibergen, the Netherlands. Rotor sells standard and special electric motors to a variety of industries including the marine industry, ship building and offshore oil and gas. In addition to the Netherlands, Rotor also sells throughout Europe, the United Kingdom and Japan. The purchase price of $36.4 million was paid in cash, net of acquired debt and cash. Rotor is reported as part of the Company’s Electrical segment.

On May 4, 2010, the Company acquired Air-Con Technology (“Air-Con”), located in Mississauga, Ontario, Canada. Air-Con is a distributor of HVACR electric motors. Air-Con is reported as part of the Company’s Electrical segment.

On April 6, 2010, the Company acquired CMG Engineering Group Pty, Ltd. (“CMG”), located in Melbourne, Australia. CMG manufactures and sells 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 business also distributes integral horsepower industrial motors, mechanical power transmission products, material handling equipment, electrical insulation materials, magnet wire and specialty conductors in Australia and New Zealand. The purchase price was $82.6 million, net of acquired debt and cash. The purchase price was paid $76.5 million in cash and $6.1 million in shares of Company common stock. CMG is reported as part of our Electrical and Mechanical segments.

Pending Acquisition

On December 12, 2010, the Company and A.O. Smith Corporation (NYSE: AOS) entered into an agreement pursuant to which the Company will acquire the Electrical Products Company of A.O. Smith Corporation. The total consideration for the transaction consists of $700 million of cash and 2,834,026 shares of Company common stock. Closing on the transaction is subject to all customary regulatory approvals, which are still pending as of the date of this filing.

4. COMPREHENSIVE INCOME

The Company’s consolidated comprehensive income for the three and six months ended July 2, 2011 and July 3, 2010, respectively, was as follows (in thousands):

		Three Months Ended								Six Months Ended
		July 2, 2011				July 3, 2010				July 2, 2011				July 3, 2010
Net income		$	35,985			$	42,775			$	76,808			$	82,643
Other Comprehensive Income (Loss) from:
Currency Translation adjustments			7,842				(14,961	)			18,595				(7,535	)
Changes in fair value on open hedge contracts, net of tax effect of ($535), ($10,530), $1,022, and ($7,597)			(871	)			(17,180	)			1,669				(12,435	)
Hedging activities reclassified into earnings from accumulated other comprehensive income (loss) (“AOCI”), net of tax effect of ($3,158), $401, ($5,319), and $854			(5,107	)			654				(8,631	)			1,394
Amortization of net prior service costs and actuarial losses, net of tax			436				364				1,092				811
Comprehensive income		$	38,285			$	11,652			$	89,533			$	64,878

The amount of comprehensive income attributable to noncontrolling interests was $1.9 million and $3.3 million for the three and six months ended July 2, 2011, respectively. The amount of comprehensive income attributable to noncontrolling interests was $1.1 million and $3.2 million for the three and six months ended July 3, 2010, respectively.

Foreign currency translation adjustments, unrealized gains and losses on derivative instruments and pension liability adjustments are included in Equity under Accumulated Other Comprehensive Income (Loss). The components of the ending balances of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands):

		July 2, 2011				January 1, 2011
Translation adjustments		$	42,100			$	23,190
Hedging activities, net of tax			(4,120	)			2,842
Pension and post retirement benefits, net of tax			(26,640	)			(27,732	)
		$	11,340			$	(1,700	)

5. 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 July 2, 2011 and July 3, 2010 (in thousands):

		Three Months Ended								Six Months Ended
		July 2, 2011				July 3, 2010				July 2, 2011				July 3, 2010
Beginning balance		$	12,584			$	13,398			$	12,831			$	13,298
Deduct: Payments			(2,979	)			(3,438	)			(5,833	)			(6,883	)
Add: Provision			31,295				3,148				33,876				6,637
Translation Adjustments			48				(22	)			74				34
Ending balance		$	40,948			$	13,086			$	40,948			$	13,086

The accrued warranty costs for the three and six months ended July 2, 2011 include an incremental $28.0 million in accrued costs due to a production flaw, which has been corrected, in certain standard motors produced in one of the Company’s facilities during a limited period in 2011. The $28.0 million accrued is the Company’s best estimate of the warranty costs associated with the production flaw based on current analysis and is expected to be paid out within the next twelve months.

The accrued warranty costs are included with Other Accrued Expenses on the balance sheet.

6. BUSINESS SEGMENTS

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

		Mechanical Segment								Electrical Segment								Mechanical Segment								Electrical Segment
		Three Months Ended								Three Months Ended								Six Months Ended								Six Months Ended
		July 2, 2011				July 3, 2010				July 2, 2011				July 3, 2010				July 2, 2011				July 3, 2010				July 2, 2011				July 3, 2010
Net Sales		$	70,471			$	61,391			$	611,314			$	522,790			$	138,836			$	111,464			$	1,205,604			$	980,035
Income from Operations			9,885				7,964				44,924				58,835				18,492				14,384				100,437				115,180
% of Net Sales			14.0	%			13.0	%			7.4	%			11.3	%			13.3	%			12.9	%			8.3	%			11.8	%
Goodwill at end of period		$	13,255			$	8,855			$	780,461			$	677,493			$	13,255			$	8,855			$	780,461			$	677,493

7. GOODWILL AND OTHER INTANGIBLES

Goodwill

As required, the Company performs an 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 its reporting units below their carrying value.

At July 2, 2011, substantially 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):

						Electrical				Mechanical
		Total				Segment				Segment
Balance as of January 2, 2010		$	663,920			$	663,920			$	—
Acquisitions			23,869				15,010				8,859
Translation Adjustments			(1,441	)			(1,437	)			(4	)
Balance as of July 3, 2010		$	686,348			$	677,493			$	8,855
Balance as of January 1, 2011		$	775,371			$	763,135			$	12,236
Acquisitions and Valuation Adjustments			12,161				12,096				65
Translation Adjustments			6,184				5,230				954
Balance as of July 2, 2011		$	793,716			$	780,461			$	13,255

Intangible Assets

Intangible assets consisted of the following (dollars in thousands):

						July 2, 2011								July 3, 2010
		Useful Life				Gross				Accumulated				Gross				Accumulated
		(years)				Value				Amortization				Value				Amortization
Customer Relationships			3 — 17			$	144,406			$	(48,709	)		$	104,396			$	(34,498	)
Technology			3 — 9				79,770				(17,458	)			33,452				(10,739	)
Trademarks			3 — 20				31,657				(11,476	)			23,586				(8,374	)
Patents & Engineering Drawings			10				16,610				(10,831	)			16,610				(9,169	)
Non-Compete Agreements			3 — 5				8,207				(6,343	)			6,372				(5,412	)
						$	280,650			$	(94,817	)		$	184,416			$	(68,192	)
Net Values										$	185,833							$	116,224

Estimated Amortization (in millions)

2011			2012				2013				2014				2015
$	28.8		$	29.4			$	30.0			$	28.2			$	20.4

Amortization expense recorded for the three and six months ended July 2, 2011 was $7.3 million and $14.4 million, respectively. Amortization expense recorded for the three and six months ended July 3, 2010 was $5.1 million and $9.5 million, respectively.

8. DEBT AND BANK CREDIT FACILITIES

The Company’s indebtedness as of July 2, 2011 and January 1, 2011 was as follows (in thousands):

		July 2, 2011				January 1, 2011
Senior notes		$	250,000			$	250,000
Term loan			165,000				165,000
Revolving credit facility			—				—
Other			27,326				21,893
			442,326				436,893
Less: Current maturities			(14,282	)			(8,637	)
Non-current portion		$	428,044			$	428,256

At July 2, 2011, 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”). These interest rates vary as LIBOR varies. At July 2, 2011, the interest rate of 0.9% was based on a margin over LIBOR.

On June 16, 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 a margin over LIBOR. The margin varies with the ratio of the Company’s total funded debt to consolidated earnings before interest, taxes, depreciation, and amortization

(“EBITDA”) as defined in the Term Loan. These interest rates also vary as LIBOR varies. At July 2, 2011, the interest rate of 0.9% was based on a margin over LIBOR.

On June 30, 2011, the Company entered into a new $500.0 million revolving credit facility (the “Facility”) that replaced its existing credit facility which was set to mature in July 2012. The 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 funded debt to EBITDA. The Facility matures in June 2016.

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 financial debt covenants as of July 2, 2011.

The Company has entered into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. (See also Note 14 of Notes to Condensed Consolidated Financial Statements.)

At July 2, 2011, other notes payable of approximately $27.3 million were outstanding with a weighted average interest rate of 6.0%.

9. PENSION PLANS

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

		Three Months Ended								Six Months Ended
		July 2, 2011				July 3, 2010				July 2, 2011				July 3, 2010
Service cost		$	617			$	1,172			$	1,337			$	2,344
Interest cost			1,988				3,468				3,976				6,937
Expected return on plan assets			(1,828	)			(3,131	)			(3,656	)			(6,262	)
Amortization of prior service cost and net actuarial loss
			918				1,221				1,836				2,443
Net periodic benefit expense		$	1,695			$	2,730			$	3,493			$	5,462

The estimated net actuarial loss and prior service cost for defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost during the 2011 fiscal year is $3.3 million and $0.2 million, respectively.

During the first six months of 2011 and 2010, the Company contributed $1.2 million and $1.0 million, respectively, to defined benefit pension plans. The Company expects to contribute an additional $1.0 million, for total contributions of $2.2 million in 2011. The Company contributed a total of $4.1 million in 2010. 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 2010 Annual Report on Form 10-K filed on March 2, 2011.

10. SHAREHOLDERS’ EQUITY

The Company recognized approximately $4.4 million and $1.7 million in share-based compensation expense for the three month period ended July 2, 2011 and July 3, 2010, respectively. Share-based compensation expense for the six month period ended July 2, 2011 and July 3, 2010 was $6.2 million and $3.1 million, respectively. The total excess income tax benefit recognized relating to share-based compensation for the six months ended July 2, 2011 and July 3, 2010 was approximately $1.0 million and $1.4 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. As of July 2, 2011, total unrecognized compensation cost related to share-based compensation awards was approximately $27.0 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 3.1 years.

The Company was authorized as of July 2, 2011 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 1.4 million shares were available for future grant or payment under the various plans at July 2, 2011.

Share-based Incentive Awards

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 2011 annual grant was $26.81. The fair

market 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 1.0%; expected volatility of 35.5%; and an estimated life of 7.0 years.

A summary of share-based awards (options and SARs) as of July 2, 2011 follows below. Forfeitures of share-based awards were immaterial.

						Wtd. Avg.				Wtd. Avg. Remaining				Aggregate Intrinsic
		Shares				Exercise Price				Contractual Term (years)				Value (in millions)
Number of shares:
Outstanding			1,737,075			$	48.74				7.1			$	35.6
Exercisable			792,575				38.38				5.4				24.2

Restricted Stock

As of July 2, 2011, the Company had 231,730 shares of restricted stock outstanding with a weighted average grant date fair value of $61.26 and a weighted average life of 2.3 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 six months of 2011 30,350 shares of restricted stock vested with a weighted average fair value of $43.56 per share, 81,203 shares of restricted stock granted with a weighted average fair value of $72.06 per share, and 300 shares of restricted stock forfeited with a weighted average fair value of $52.01 per share.

11. INCOME TAXES

The effective tax rate for the three months ended July 2, 2011 was 28.6% versus 31.9% for the three months ended July 3, 2010. The effective tax rate for the six months ended July 2, 2011 was 30.0% versus 31.8% in the prior period. The change in the effective rates was driven by changes in the global distribution of income.

As of both July 2, 2011 and January 1, 2011, the Company had approximately $5.5 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 2007 through 2010 and various state tax returns remain subject to income tax examinations by tax authorities.

12. 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 Ended								Six Months Ended
		July 2, 2011				July 3, 2010				July 2, 2011				July 3, 2010
Denominator for basic EPS — weighted average			38,667				38,310				38,647				37,878
Effect of dilutive securities			546				644				535				918
Denominator for diluted EPS			39,213				38,954				39,182				38,796

The “Effect of dilutive securities” represents the dilution impact of equity awards and convertible notes that were fully converted during 2010. The dilutive effect of the convertible notes was approximately 0.2 million shares and 0.5 million shares for the three and six months ended July 3, 2010, respectively.

Options for common shares where the exercise price was above the market price at July 2, 2011 and July 3, 2010 totaling approximately 0.4 million and 0.3 million shares have been excluded from the calculation of the effect of dilutive securities as the effect of such options is anti-dilutive.

13. CONTINGENCIES

On July 30, 2009, the Company 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 the Company’s 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 its response and counterclaims against Nordyne the Company is 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 its G7 furnace systems and iQ Drive 23-seer air conditioning systems. The Company has 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 the Company compensatory and other damages caused by such infringement. The Company intends to defend its intellectual property vigorously against the claims asserted by Nordyne and against any infringement by Nordyne or any other person. The Company does not currently believe that the litigation will have a material effect on the Company’s financial position or its results of operations.

One of the Company’s subsidiaries that it acquired in 2007 is subject to numerous claims filed in various jurisdictions relating to certain sub-fractional motors that were primarily manufactured through 2004 and that were included as components of residential and commercial ventilation units marketed by a third party. These claims generally allege that the ventilation units were the cause of fires. Based on the current facts, the Company does not believe these claims, individually or in the aggregate, will have a material effect on its results of operations or financial condition. However, the Company cannot predict the outcome of these claims, or the nature or extent of remedial actions, if any, it may need to undertake with respect to motors that remain in the field. As a result, it cannot estimate a range of reasonably possible losses associated with these matters, some of which could be significant.

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, individually or in the aggregate, will have a material effect on the Company’s financial position or its results of operations.

14. DERIVATIVE INSTRUMENTS

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 July 2, 2011.

Cash flow hedges

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 July 2, 2011, the Company had an additional $3.4 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 July 3, 2010, the Company had an additional ($0.4) 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 July 2, 2011, the Company had outstanding the following commodity forward contracts (with maturities extending through September 2012) to hedge forecasted purchases of commodities (in millions):

		Notional Amount
Copper		$	145.0
Aluminum			3.0
Zinc			0.2
Natural Gas			0.5

As of July 2, 2011, the Company had outstanding the following currency forward contracts (with maturities extending through December 2013) to hedge forecasted foreign currency cash flows (in millions):

		Notional Amount
Mexican Peso		$	95.7
Indian Rupee			36.8
Chinese Renminbi			10.5
Australian Dollar			9.5
Thai Baht			3.6

As of July 2, 2011, 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 July 2, 2011 and January 1, 2011 were (in millions):

		July 2, 2011
		Prepaid				Other Noncurrent				Accrued				Hedging
		Expenses				Assets				Expenses				Obligations
Designated as hedging instruments:
Interest rate swap contracts		$	—			$	—			$	—			$	38.4
Foreign exchange contracts			9.4				2.6				0.4
Commodity contracts			14.6				0.2				0.1				—
Not designated as hedging instruments:
Foreign exchange contracts			—				—				0.3				—
Commodity contracts			0.1				—				—				—
Total Derivatives:		$	24.1			$	2.8			$	0.8			$	38.4

		January 1, 2011
		Prepaid				Other Noncurrent				Accrued				Hedging
		Expenses				Assets				Expenses				Obligations
Designated as hedging instruments:
Interest rate swap contracts		$	—			$	—			$	—			$	39.1
Foreign exchange contracts			7.1				1.4				0.1				0.1
Commodity contracts			24.7				4.2				0.1				—
Not designated as hedging instruments:
Foreign exchange contracts			0.2				—				—				—
Commodity contracts			0.2				—				—				—
Total Derivatives:		$	32.2			$	5.6			$	0.2			$	39.2

The effect of derivative instruments on the condensed consolidated statements of equity and earnings for the three and six months ended July 2, 2011 and July 3, 2010, was (in millions):

Derivatives Designated as Cash Flow Hedging Instruments

		Three Months Ended																Three Months Ended
		July 2, 2011																July 3, 2010
										Interest																Interest
		Commodity				Currency				Rate								Commodity				Currency				Rate
		Forwards				Forwards				Swaps				Total				Forwards				Forwards				Swaps				Total
Gain (Loss) recognized in
Other Comprehensive Income (Loss)		$	1.7			$	3.3			$	(6.4	)		$	(1.4	)		$	(8.9	)		$	(6.1	)		$	(12.7	)		$	(27.7	)
Amounts reclassified from Other
Comprehensive Income (Loss) were:
Gain recognized in Net Sales			—				0.2				—			$	0.2				—				—				—			$	—
Gain (Loss) recognized in Cost of Sales			8.9				2.4				—			$	11.3				2.2				(0.5	)			—			$	1.7
Loss recognized in Interest Expense			—				—				(3.2	)		$	(3.2	)			—				—				(2.8	)		$	(2.8	)

Derivatives Designated as Cash Flow Hedging Instruments

		Six Months Ended																Six Months Ended
		July 2, 2011																July 3, 2010
										Interest																Interest
		Commodity				Currency				Rate								Commodity				Currency				Rate
		Forwards				Forwards				Swaps				Total				Forwards				Forwards				Swaps				Total
Gain (Loss) recognized in Other Comprehensive Income (Loss)		$	(0.2	)		$	8.6			$	(5.7	)		$	2.7			$	(4.9	)		$	1.8			$	(16.9	)		$	(20.0	)
Amounts reclassified from Other Comprehensive Income (Loss) were:
Gain (Loss) recognized in Net Sales			—				0.4				—			$	0.4				—				(0.1	)			—			$	(0.1	)
Gain (Loss) recognized in Cost of Sales			17.1				2.9				—			$	20.0				5.5				(1.7	)			—			$	3.8
Loss recognized in Interest Expense			—				—				(6.4	)		$	(6.4	)			—				—				(6.0	)		$	(6.0	)

The ineffective portion of hedging instruments recognized during the three and six months ended July 2, 2011 and July 3, 2010 was immaterial.

Derivatives Not Designated as Cash Flow Hedging Instruments

		Three Months Ended												Three Months Ended												Six Months Ended												Six Months Ended
		July 2, 2011												July 3, 2010												July 2, 2011												July 3, 2010
		Commodity				Currency								Commodity				Currency								Commodity				Currency								Commodity				Currency
		Forwards				Forwards				Total				Forwards				Forwards				Total				Forwards				Forwards				Total				Forwards				Forwards				Total
Loss recognized in Cost of Sales		$	(0.2	)		$	(0.6	)		$	(0.8	)		$	(0.5	)		$	(0.1	)		$	(0.6	)		$	(0.2	)		$	(0.9	)		$	(1.1	)		$	(0.6	)		$	(0.1	)		$	(0.7	)

The net AOCI hedging component balance of ($4.1) million loss at July 2, 2011 includes $8.1 million of net current deferred gains expected to be realized in the next twelve months.

15. FAIR VALUE

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:

Level 1		Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2		Unadjusted quoted prices in active markets for similar assets or liabilities, or
		Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
		Inputs other than quoted prices that are observable for the asset or liability
Level 3		Unobservable inputs for the asset or liability

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 July 2, 2011 and January 1, 2011 (in millions):

		July 2, 2011				January 1, 2011
Assets:
Investments — Trading Securities		$	—			$	56.3			(Level 2)
Prepaid Expenses and Other Current Assets:
Derivative Currency Contracts			9.4				7.3			(Level 2)
Derivative Commodity Contracts			14.7				24.9			(Level 2)
Other Noncurrent Assets:
Derivative Currency Contracts			2.6				1.4			(Level 2)
Derivative Commodity Contracts			0.2				4.2			(Level 2)
Liabilities:
Other Accrued Expenses:
Derivative Currency Contracts			0.7				0.1			(Level 2)
Derivative Commodity Contracts			0.1				0.1			(Level 2)
Hedging Obligations:
Interest Rate Swap			38.4				39.1			(Level 2)
Derivative Currency Contracts			—				0.1			(Level 2)
Other Noncurrent Liabilites:
Deferred Contingent Purchase Price			25.9				11.0			(Level 3)

The table below sets forth a summary of changes in fair market value of the Company’s Level 3 Other Noncurrent Liabilities for the three and six months ended July 2, 2011. There were no such Other Noncurrent Liabilities for the three and six months ended July 3, 2010 (in millions):

		Three Months Ended				Six Months Ended
		July 2, 2011				July 2, 2011
Beginning Balance		$	9.2			$	11.0
Valuation adjustments			—				(1.8	)
Acquisitions			16.7				16.7
Ending balance		$	25.9			$	25.9

The Other Noncurrent Liabilities described above are comprised entirely of the Deferred Contingent Purchase Price of two of the Company’s acquisitions as discussed in Note 3, and are measured using Level 3 inputs. The fair value was determined using valuation techniques, including discounted cash flows, comparable transactions, and/or comparable company analyses.

16. RELATED PARTY TRANSACTIONS

As part of the consideration paid for the acquisition of Elco on November 1, 2010, the Company assumed $22.3 million payable to an entity that is affiliated with our Elco Group B.V. joint venture partner resulting from bankruptcy proceeding involving Elco. The amount is payable in three remaining semi-annual payments ending in 2012. During the first six months of 2011, $5.6 million was paid by the Company. The Company has included the current amounts in Other Accrued Expenses and the long-term amount in Other Noncurrent Liabilities.

17. SUBSEQUENT EVENT

On July 14, 2011, the Company issued $423 million in senior unsecured notes in a private placement. The notes were issued in five tranches with maturities from seven to twelve years and carry fixed interest rates between 4.1% and 5.1%. The proceeds from the issuance of the notes will be available to finance a portion of the pending acquisition of the Electrical Products Company from A.O. Smith Corporation (See also Note 3 of Notes to Condensed Consolidated Financial Statements).

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context requires otherwise, references in this Item 2 to “we,” “us,” “our” or the “Company” refer collectively to Regal Beloit Corporation and its subsidiaries.

Overview

Global economic conditions continued to reflect sluggish growth trends in the second quarter 2011. Sales of high efficiency products continued to show above average growth rates, supported by the net economic impact to the end user and, in certain cases, by tax credits and government regulations requiring higher energy efficiency ratings on certain types of motors.

Net sales for the second quarter 2011 increased 16.7% to $681.8 million compared to $584.2 million in the second quarter 2010. Net sales for the second quarter 2011 included $60.0 million of incremental net sales from the acquired businesses.

Net Income Attributable to Regal Beloit Corporation decreased 17.7% to $34.3 million for the second quarter 2011 compared to $41.7 million for the second quarter 2010. Diluted earnings per share decreased to $0.88 for the second quarter 2011 compared to $1.07 for the second quarter 2010. The decrease was primarily driven by an incremental $28.0 million (or $0.44 diluted earnings per share) in accrued warranty costs due to a production flaw, which has been corrected, in certain standard motors produced in one of our facilities during a limited period in 2011.

Results of Operations

Net Sales

		(In millions)
		Three Months Ended								Six Months Ended
		July 2, 2011				July 3, 2010				July 2, 2011				July 3, 2010
Net Sales		$	681.8			$	584.2			$	1,344.4			$	1,091.5
Sales growth rate			16.7	%			28.5	%			23.2	%			21.6	%
Net Sales by Segment:
Electrical segment		$	611.3			$	522.8			$	1,205.6			$	980.0
Sales growth rate			16.9	%			28.4	%			23.0	%			22.7	%
Mechanical segment		$	70.5			$	61.4			$	138.8			$	111.5
Sales growth rate			14.8	%			29.8	%			24.6	%			12.3	%