Regal Beloit Corporation FY2018 Form 10-K Summary
Filing identity: The supplied filing is for Regal Beloit Corporation, not Regal Rexnord Corporation. It covers the 52-week fiscal year ended December 29, 2018; the requested “2018 Q4” period is included in the annual filing. Fiscal fourth-quarter results are also shown below.
Business context and reporting period
Regal Beloit manufactures electric motors, electrical motion controls, power-generation equipment, and mechanical power-transmission products. Its three operating segments are Commercial and Industrial Systems, Climate Solutions, and Power Transmission Solutions. The company employed approximately 24,600 people worldwide and operated globally across North America, Europe, Asia, and other markets.
On April 10, 2018, the company acquired Nicotra Gebhardt S.p.A. for $161.5 million net of cash acquired. The acquisition contributed approximately 2.9% of consolidated fiscal 2018 sales growth and was included in Commercial and Industrial Systems from the acquisition date.
Financial performance and key metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $3,645.6 million | $3,360.3 million | Up 8.5% |
| Gross profit | $964.6 million | $883.6 million | Up 9.2% |
| Gross margin | 26.5% | 26.3% | Up 20 basis points |
| Income from operations | $347.0 million | $331.1 million | Up 4.8% |
| Operating margin | 9.5% | 9.9% | Down 40 basis points |
| Net income attributable to Regal Beloit | $231.2 million | $213.0 million | Up 8.5% |
| Diluted EPS | $5.26 | $4.74 | Up 11.0% |
| Operating cash flow | $362.7 million | $291.9 million | Up $70.8 million |
Approximate FY2018 net income attributable to Regal Beloit margin was 6.3%. Interest expense was $55.2 million, income taxes were $56.4 million, and the effective tax rate was 19.3%, compared with 21.3% in FY2017.
Segment sales were $1,782.0 million for Commercial and Industrial Systems, $1,024.8 million for Climate Solutions, and $838.8 million for Power Transmission Solutions. Segment operating margins were 7.1%, 11.3%, and 12.4%, respectively.
Fourth-quarter FY2018 sales were $881.7 million, gross profit was $239.7 million, operating income was $89.8 million, net income attributable to Regal Beloit was $55.6 million, and diluted EPS was $1.28. Fourth-quarter FY2017 sales were $820.7 million and diluted EPS was $1.15.
Cash flow, liquidity, debt, and capital allocation
- Cash and cash equivalents were $248.6 million at year-end, compared with $139.6 million in the prior year. Approximately $243.8 million was held by foreign subsidiaries.
- Working capital was $1,134.2 million and the current ratio was 2.7:1, compared with $862.4 million and 2.2:1, respectively, in FY2017.
- Capital expenditures were $77.6 million, and fiscal 2019 capital spending was expected to be approximately $90.0 million.
- Investing cash flow used $227.9 million, primarily reflecting the Nicotra Gebhardt acquisition. Financing cash flow used $17.7 million.
- Total debt was $1,307.1 million, including $1,306.6 million of long-term debt. Debt increased from $1,141.1 million in FY2017, primarily due to acquisition financing and the refinancing of existing facilities.
- The company had $401.2 million of available revolving-credit capacity and was in compliance with all debt covenants at year-end. Fixed-rate debt was $404.7 million and variable-rate debt was $908.6 million.
- The company paid $47.2 million in shareholder dividends and repurchased $127.8 million of common stock during FY2018. A remaining repurchase authorization of approximately $196.9 million was available at year-end.
Material changes versus the prior comparable period
- Sales growth comprised 5.7% organic growth and 2.9% acquisition growth, primarily from Nicotra Gebhardt.
- Commercial and Industrial Systems sales increased 11.1%, Climate Solutions sales increased 3.5%, and Power Transmission Solutions sales increased 9.6%.
- Gross margin improved modestly because of volume, pricing, and productivity gains, but commodity inflation, inventory write-downs, Hermetic Climate exit costs, and acquisition-related purchase accounting charges offset part of the benefit.
- Operating margin declined because operating expenses increased, including compensation, commercial-investment spending, variable selling costs, Nicotra Gebhardt expenses, and Hermetic Climate exit costs.
- The company recognized $34.9 million of exit and exit-related charges for the Hermetic Climate business, including $9.5 million of goodwill impairment, $7.6 million of intangible-asset impairment, $1.1 million of fixed-asset impairment, and other receivable, inventory, and exit costs.
- In December 2018 and January 2019, the company classified its engineered drives and controls systems business and capacitors business as held for sale. The engineered drives and controls transaction closed in January 2019; the capacitors transaction was expected to close in the second quarter of 2019.
- Backlog increased to $493.4 million from $447.2 million, and management expected virtually all year-end backlog to ship in fiscal 2019.
Guidance, outlook, risks, and unusual items
Management forecast low- to mid-single-digit organic sales growth, improved operating margin, and diluted FY2019 EPS of $6.59 to $6.99, based on an assumed effective tax rate of 21%. Management expected benefits from new products addressing upcoming energy-efficiency regulations.
- Key risks include commodity-price inflation, tariffs and trade-policy changes, foreign-currency volatility, international manufacturing and supply-chain disruptions, intense competition, customer concentration, cyclical capital-goods demand, and dependence on HVAC, refrigeration, power-generation, oil-and-gas, and material-handling markets.
- The company has substantial variable-rate debt and is exposed to interest-rate increases. Its credit agreements contain financial covenants and restrictions.
- A subsidiary faces numerous product-liability claims involving ventilation units alleged to have caused fires. The company has recorded an estimated liability but stated that potential CPSC or other remedial costs could be significant and cannot be reasonably predicted.
- Goodwill and intangible assets are significant portions of total assets. Although all reporting units exceeded carrying value by at least 10% in the FY2018 impairment testing, changes in forecasts, discount rates, or market conditions could result in future impairment charges.
- CEO Mark Gliebe was expected to retire after an orderly transition to a new CEO before the end of the second quarter of FY2019.
- Internal control over financial reporting and disclosure controls were assessed as effective. The auditors issued unqualified opinions, although Nicotra Gebhardt was excluded from management’s internal-control assessment because it was acquired during FY2018.
Important facts for investors to verify
- Confirm the issuer name and ticker: the filing identifies Regal Beloit Corporation, NYSE ticker RBC, rather than Regal Rexnord Corporation.
- Reconcile FY2019 EPS guidance of $6.59 to $6.99 with the effects of the Hermetic Climate exit, planned divestitures, commodity costs, and integration of Nicotra Gebhardt.
- Monitor debt reduction, variable-rate exposure, covenant headroom, and the concentration of cash held by foreign subsidiaries.
- Assess whether the company achieves the forecast operating-margin improvement after FY2018 margin contraction.
- Track the completion and proceeds of the engineered drives and controls and capacitors divestitures.
- Review the ultimate cost and resolution of the ventilation-unit fire claims and any related CPSC action.
- Evaluate the sustainability of segment growth, particularly the weaker Climate Solutions operating performance after Hermetic Climate exit charges.