Summary of REGAL BELOIT CORP

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. All amounts referred to in this Management's Discussion and Analysis of Financial Condition and Results of Operations reflect the adjustment of convertible debt and related interest expense discussed in Note 2 of Notes to Condensed Consolidated Financial Statements.

OVERVIEW

The global impact of the credit crisis and the current global macro economic environment continue to negatively impact the demand for our products as reflected in our revenue performance for the third quarter. The exception to these trends have been 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. During the third quarter, we also benefited from temporary favorability in raw material costs and we continued to reduce manufacturing and operating expenses to improve our profitability as a result of the weak demand environment.

Net sales for the three months ended September 26, 2009 decreased 25.0% to $465.2 million from $620.6 million in the comparable period of 2008. Sales for the three months ended September 26, 2009 included $11.7 million of incremental sales related to the 2008 Dutchi acquisition and the CPT acquisition completed on January 2, 2009 (as described in Note 4 of Notes to Condensed Consolidated Financial Statements).

Net income attributable to Regal Beloit Corporation decreased 13.8% to $31.2 million for the three months ended September 26, 2009 as compared to $36.1 million in the comparable period last year. Diluted earnings per share decreased 23.4% to $0.82 for the three months ended September 26, 2009 as compared to $1.07 for the comparable period of 2008.

RESULTS OF OPERATIONS

Three Months Ended September 26, 2009 versus Three Months Ended September 27, 2008

Sales for the three months ended September 26, 2009 were $465.2 million, a 25.0% decrease over the $620.6 million reported for the three months ended September 27, 2008. Third quarter 2009 sales included $11.7 million of incremental sales related to the 2008 Dutchi acquisition and the CPT acquisition completed on January 2, 2009 (as described in Note 4 of Notes to Condensed Consolidated Financial Statements).

In the Electrical segment, sales decreased 24.2% from the prior year period, including the impact of the acquisitions noted above. Exclusive of the Dutchi and CPT acquired businesses, Electrical segment sales decreased 26.3%, largely due to global generator sales decreasing 55.2%, commercial and industrial motors sales in North America decreasing 29.6%, and residential HVAC motor sales decreasing 8.3%. Sales in the Mechanical segment decreased 32.6% from the prior year period. From a geographic perspective, Asia-based sales decreased 28.3% as compared to the comparable period of 2008. In total, sales to regions outside of the United States were 25.6% of total sales for the three months ended September 26, 2009 in comparison to 26.8% for the comparable period of 2008. The negative impact of foreign currency exchange rates decreased total sales by 1.1% for the quarter ended September 26, 2009.

The gross profit margin for the three months ended September 26, 2009 was 24.5% as compared to the 21.4% reported for the comparable period of 2008. The gross profit margin for the Electrical segment was 24.6% for the three months ended September 26, 2009 versus 20.6% in the comparable period of 2008. The Electrical segment gross profit margin increase was driven by favorable raw material costs that are temporary in nature and are not expected to repeat in future quarters. The Mechanical segment gross profit was 23.3% in the three months ended September 26, 2009 versus 28.0% in the comparable period of 2008. The Mechanical segment decrease is driven by the negative fixed cost absorption impact of lower production volumes. The Company's 2009 margins were also favorably impacted by a positive product mix shift to high efficiency products (19.3% of 2009 total sales) and cost reduction activities.

Operating expenses were $65.6 million (14.1% of sales) in the three months ended September 26, 2009 versus $67.1 million (10.8% of sales) in the comparable period of 2008. Operating expenses included an incremental amount of approximately $4.0 million related to the acquired Dutchi and CPT businesses offset by reductions in variable expenses, such as sales commissions, and the impact of cost reduction activities. Other operating expense increases included increased bad debt, legal, and restructuring expense. Electrical segment operating expenses were 13.7% of net sales for the three months ended September 26, 2009 versus 10.5% in the comparable period of 2008. Mechanical operating expenses were 17.8% and 13.8% of sales for the three months ended September 26, 2009 and September 27, 2008, respectively.

Income from operations was $48.3 million versus $65.7 million in the comparable period of 2008. As a percent of sales, income from operations was 10.4% for the three months ended September 26, 2009 versus 10.6% in the comparable period of 2008. As a percent of sales, Electrical segment operating profit was 10.9% in the third quarter of 2009 versus 10.2% in the comparable period of 2008. Mechanical segment operating profit was 5.6% of sales in the third quarter of 2009 versus 14.3% in the comparable period of 2008.

Net interest expense was $5.0 million versus $7.9 million in the comparable period of 2008. The decrease is driven primarily by lower effective interest rates in 2009 versus the comparable period of 2008, and lower average debt outstanding.

The effective tax rate for the three months ended September 26, 2009 was 26.9% versus 36.0% in the prior year period. The decrease in the effective rate is driven by changes in the global distribution of income, as well as adjustments to tax reserves due to a statutory expiration.

Net income attributable to Regal Beloit Corporation for the three months ended September 26, 2009 was $31.2 million, a decrease of 13.8% versus the $36.1 million reported in the comparable period of 2008. Fully diluted earnings per share was $0.82 as compared to $1.07 per share reported in the third quarter of 2008. The average number of diluted shares was 38,183,014 during the three months ended September 26, 2009 was as compared to 33,715,881 during the comparable period of 2008.

Nine Months Ended September 26, 2009 versus Nine Months Ended September 27, 2008

Sales for the nine months ended September 26, 2009 were $1,363.0 million, a 22.7% decrease over the $1,763.3 million reported for the nine months ended September 27, 2008. In 2009, sales included $57.7 million of incremental sales related to the 2008 acquired businesses and the CPT acquisition completed on January 2, 2009 (as described in Noted 4 of Notes to Condensed Consolidated Financial Statements).

In the Electrical segment, sales decreased 22.3% from the prior year period, including the impact of the acquisitions noted above. Exclusive of the acquired businesses, Electrical segment sales decreased 26.0%, largely due to global generator sales decreasing 45.1%, commercial and industrial motors sales in North America decreasing 28.8%, and residential HVAC motor sales decreasing 11.0%. Sales in the Mechanical segment decreased 25.8% from the prior year period. From a geographic perspective, Asia-based sales decreased 30.1% as compared to the comparable period of 2008. In total, sales to regions outside of the United States were 26.3% of total sales for the nine months ended September 26, 2009 in comparison to 26.5% for the comparable period of 2008. The negative impact of foreign currency exchange rates decreased total sales by 1.5%.

The gross profit margin for the nine months ended September 26, 2009 was 21.9% which was equal to the comparable period of 2008. The gross profit margin for the Electrical segment was 21.6% for the nine months ended September 26, 2009 versus 21.1% in the comparable period of 2008. The Electrical segment gross profit margin increase was driven by favorable third quarter raw material costs that are temporary in nature and are not expected to repeat in future quarters. The Mechanical segment gross profit was 24.7% in the nine months ended September 26, 2009 versus 28.1% in the comparable period of 2008. The decrease is driven by the negative absorption impact of lower sales volumes. The Company's 2009 margins were favorably impacted by a positive product mix shift to high efficiency product (17.4% of 2009 total sales), and cost reduction activities.

Operating expenses were $193.1 million (14.2% of sales) in the nine months ended September 26, 2009 versus $195.2 million (11.1% of sales) in the comparable period of 2008. Operating expenses included an incremental amount of approximately $13.0 million related to the acquired Dutchi, Hwada and CPT businesses offset by reductions in variable expenses, such as sales commissions, and the impact of cost reduction activities. Electrical segment operating expenses were 14.0% of net sales for the nine months ended September 26, 2009 versus 10.8% in the comparable period of 2008. Mechanical operating expenses for the nine months ended September 26, 2009 were 15.7% of sales versus 13.1% in the equivalent period of 2008.

Income from operations was $106.0 million versus $190.8 million in the comparable period of 2008. As a percent of sales, income from operations was 7.8% for the nine months ended September 26, 2009 versus 10.8% in the comparable period of 2008. As a percent of sales, Electrical segment operating profit was 7.6% in 2009 versus 10.3% in the comparable period of 2008. Mechanical segment operating profit was 9.0% of sales in 2009 versus 15.0% in the comparable period of 2008.

Net interest expense was $17.1 million versus $23.8 million in the comparable period of 2008. The decrease is driven by lower effective interest rates in 2009 versus the comparable period of 2008, and lower average debt outstanding.

The effective tax rate for the nine months ended September 26, 2009 was 28.9% versus 35.6% in the prior year period. The decrease in the effective rate is driven by changes in the global distribution of income, as well as adjustments to tax reserves due to a statutory expiration.

Net income attributable to Regal Beloit Corporation for the nine months ended September 26, 2009 was $60.4 million, a decrease of 42.4% versus the $104.9 million reported in the comparable period of 2008. Fully diluted earnings per share was $1.71 as compared to $3.14 per share reported in 2008. The average number of diluted shares was 35,294,400 during the nine months ended September 26, 2009 as compared to 33,452,880 during the comparable period of 2008.

LIQUIDITY AND CAPITAL RESOURCES

Working capital was $624.0million at September 26, 2009, a 45.0% increase from $430.3 million at December 27, 2008. The $193.7 million increase was primarily driven by the $150.4 million of net proceeds from the sale of common stock in May 2009. In addition, a $17.4 million decrease in accounts receivable and a $100.1 million decrease in inventory, partially offset by $27.2 decrease in accounts payable provided another $90.3 million of working capital. The ratio of current assets to our current liabilities ("current ratio") was 2.6:1 at September 26, 2009 and 2.0:1 at December 27, 2008.

Net cash provided by operating activities was $235.6 million for the nine months ended September 26, 2009 as compared to $158.6 million in the comparable period of 2008. The increase is driven by large working capital improvements partially offset by lower net income in 2009 versus the comparable period of 2008. Net cash used in investing activities was $37.7 million in the first nine months of 2009 as compared to the $57.6 million used in the comparable period of the prior year. Additions to property, plant and equipment were $25.9 million in the first nine months of 2009, which was $18.1 million less than the comparable period of 2008. Our cash provided by financing activities was $90.7 million for the first nine months of 2009 driven by the $150.4 million equity offering net proceeds, versus $28.9 million used in financing activities in the comparable period of 2008. During the nine months ended September 27, 2008, the Company repurchased 110,000 shares at a total cost of $4.2 million. There were no shares repurchased in 2009.

On May 22, 2009, the Company completed a public offering of 4,312,500 shares of common stock at a price of $36.25 per share. The Company received $150.4 million of net proceeds, which it will use for general corporate and working capital purposes, including the potential repayment of debt and the funding of future acquisitions.

Our outstanding long-term debt decreased from $560.1 million at December 27, 2008 to $473.3 million at September 26, 2009. The decrease of $86.8 million includes a $47.5 million reclassification to Current Maturities of Debt for the Convertible Notes which were paid in the fourth quarter of 2009. In the fourth quarter of 2009, a total of 872,806 shares were issued to former bondholders in settlement of the conversion premium for the $47.5 million redemption. At September 26, 2009, there was $7.3 million outstanding under our $500.0 million unsecured revolving credit facility that expires on April 30, 2012 (the "Facility"). The Facility permits the Company to borrow at interest rates based upon a margin above the London Inter-Bank Offered Rate ("LIBOR"), which margin varies with the ratio of total funded debt to earnings before interest, taxes, depreciation and amortization ("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 our total debt to our EBITDA.

In 2008, the Company entered into a Term Loan Agreement ("Term Loan") with certain financial institutions, whereby the Company borrowed an aggregate principal amount of $165.0 million. The Term Loan matures in June 2013, and borrowings 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 September 26, 2009, the interest rate of 1.2% was based on a margin over LIBOR.

At September 26, 2009, there was $250.0 million of senior notes (the "Notes") outstanding. 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 LIBOR, which margin varies with the ratio of the Company's consolidated debt to consolidated EBITDA as defined in the Notes. These interest rates also vary as LIBOR varies. The Notes permit 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 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 September 26, 2009.

In addition to the Facility, the Term Loan and the Notes, at September 26, 2009, we also had $87.4 million of convertible senior subordinated debt outstanding at a fixed interest rate of 2.75%, and $20.8 million of other debt with a weighted average interest rate of 3.7%.

CRITICAL ACCOUNTING POLICIES

The Company's critical accounting policies have not changed materially from those reported in our 2008 Annual Report on Form 10-K filed on February 25, 2009.

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.

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

As a result of the impairment indicators, during the second quarter of 2009, we performed an interim goodwill impairment test for two of our goodwill reporting units using the income approach and a discount rate of 12.6%. The methodology used was similar to our annual goodwill impairment test during the fourth quarter of 2008. Based on our assessments, we concluded it was more likely than not that the fair value of our reporting units continued to exceed their carrying value at June 27, 2009, supporting our conclusion that our recorded goodwill was not impaired. During the third quarter of 2009, no further impairment indicators were identified based on the operations of the Company.

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

New Accounting Pronouncements

Recent accounting guidance requires disclosures about the fair value of financial instruments in interim reporting periods of publicly traded companies as well as in annual financial statements. The provisions are effective for the Company's interim period ending on or after June 27, 2009. The guidance amends only the Company's disclosure requirements. (See Note 9 of Notes to Condensed Consolidated Financial Statements for information regarding the fair value of financial instruments at September 26, 2009.)

In the first quarter of 2009, the Company adopted new accounting guidance which requires convertible debt securities that may be settled on conversion by the issuer fully or partially in cash, be split into a debt and equity component. The guidance is effective for fiscal years (and interim periods) beginning after December 15, 2008 and must be applied retroactively to all past periods presented. The Company has adopted the guidance on its effective date. (See Note 2 of Notes to Condensed Consolidated Financial Statements.)

Also in 2009, the Company adopted updated accounting guidance which requires expanded disclosures about derivative instruments and hedging activities. The guidance is effective for fiscal years and interim periods beginning after November 15, 2008, with earlier adoption permitted. The Company has adopted the new guidance in our financial statements and related disclosures beginning in the first quarter of 2009. (See Note 15 of Notes to Condensed Consolidated Financial Statements.)

There is also new accounting guidance which affects business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The new guidance established principles and requirements on how an acquirer recognizes and measures in its financial statements identifiable assets acquired, liabilities assumed, noncontrolling interest in the acquiree, goodwill or gain from a bargain purchase and accounting for transaction costs. Additionally, the guidance determines what information must be disclosed to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The Company has adopted the guidance upon its effective date as appropriate for any future business combinations.

Recent accounting guidance has changed the accounting and reporting for minority interests, which are recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changed the accounting for transactions with minority interest holders. As required, the Company has adopted the new guidance in our financial statements and related disclosures beginning in the first quarter of 2009.