Regal Beloit Corporation Fiscal 2015 Form 10-K Summary
Reporting period: Fiscal year ended January 2, 2016, comprising 52 weeks. The filing identifies the registrant as Regal Beloit Corporation, not Regal Rexnord Corporation. Fiscal 2014 comprised 53 weeks. The company manufactures electric motors, controls, power generation products, climate solutions, and power transmission products through three segments: Commercial and Industrial Systems, Climate Solutions, and Power Transmission Solutions.
Financial performance and position
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Net sales | $3,509.7 million | $3,257.1 million | 7.8% increase |
| Gross profit | $933.2 million | $797.3 million | 17.0% increase |
| Gross margin | 26.6% | 24.5% | 210 basis-point increase |
| Income from operations | $252.8 million | $121.5 million | 108.1% increase |
| Operating margin | 7.2% | 3.7% | 350 basis-point increase |
| Net income attributable to Regal Beloit | $143.3 million | $31.0 million | Increase |
| Diluted EPS | $3.18 | $0.69 | Increase |
| Operating cash flow | $381.1 million | $298.2 million | 27.8% increase |
| Total debt | $1,721.9 million | $632.5 million | Increase primarily from PTS financing |
| Cash and cash equivalents | $252.9 million | $334.1 million | Decrease |
Fiscal 2015 income benefited from the Power Transmission Solutions acquisition and operating simplification initiatives. Interest expense increased to $60.2 million from $39.1 million because of acquisition-related borrowings. The effective tax rate declined to 24.6% from 60.0%, principally because fiscal 2014 included a nondeductible goodwill impairment.
Cash flow, liquidity, and capital structure
- Cash used in investing activities was $1,487.6 million, including $1,401.4 million for acquisitions and $92.2 million of capital expenditures.
- Cash provided by financing activities was $1,036.6 million, including $1.25 billion of term-loan borrowings, partially offset by debt repayments, dividends, financing fees, and share repurchases.
- Working capital was $1,022.4 million and the current ratio was 2.7:1 at January 2, 2016.
- The company had $464.1 million of available borrowing capacity under its $500 million multicurrency revolving facility, after $3.0 million of borrowings and $32.9 million of standby letters of credit.
- The company stated that operating cash flow and available revolver capacity should fund operations and expected fiscal 2016 capital spending of approximately $85 million.
- Fiscal 2015 dividends paid were $40.2 million; the company declared $0.91 per share in dividends and repurchased 180,000 shares for $12.0 million.
Segment results
| Segment | Fiscal 2015 sales | Sales change | Operating margin |
|---|---|---|---|
| Commercial and Industrial Systems | $1,694.9 million | Down 8.7% | 3.2% |
| Climate Solutions | $1,041.2 million | Down 8.2% | 14.1% |
| Power Transmission Solutions | $773.6 million | Up 190.6% | 6.8% |
Commercial and Industrial Systems and Climate Solutions experienced organic sales declines, unfavorable currency translation, and weaker end-market demand. Commercial and Industrial Systems was affected by lower oil and gas activity and weaker Asian demand. Climate Solutions was affected by the prior-year SEER 13 product pre-build and lower commodity costs under material-price contracts. Power Transmission Solutions benefited primarily from the PTS acquisition but incurred purchase-accounting inventory step-up costs and acquisition-related expenses.
Material changes and unusual items
- On January 30, 2015, the company acquired Emerson Electric’s Power Transmission Solutions business for $1,408.9 million in cash and assumed $43 million of liabilities. PTS contributed $512.9 million of sales and $14.5 million of operating income in fiscal 2015, including $29.8 million of purchase-accounting inventory adjustments and transaction costs.
- The acquisition added approximately $1.25 billion of term debt and substantially increased leverage. Total debt rose by approximately $1.1 billion year over year.
- The company recorded a $79.9 million noncash goodwill impairment charge in the fourth quarter, entirely in Commercial and Industrial Systems. The after-tax impact on net income attributable to Regal Beloit was $58.1 million.
- The company wrote off $12.8 million of Venezuelan assets in the fourth quarter and decided to wind down its Venezuelan operations. A separate $1.5 million pretax currency devaluation charge was recorded earlier in the year.
- Restructuring expenses totaled $8.9 million in fiscal 2015. Current restructuring activities were expected to conclude by the end of fiscal 2016, with approximately $9.7 million of additional charges expected.
- Backlog declined to $372.7 million from $400.2 million, and virtually all backlog was expected to ship in fiscal 2016.
- Foreign currency translation reduced other comprehensive income by $94.5 million, contributing to accumulated other comprehensive loss of $255.0 million at year-end.
Outlook, risks, and contingencies
Management expected weak demand in many end markets during the second half of fiscal 2015 to continue through fiscal 2016, placing pressure on sales and earnings. Key risks include integration of PTS, elevated debt service and floating-rate exposure, compliance with financial covenants, commodity and currency volatility, global competition, oil and gas capital-spending declines, customer concentration, supply-chain disruptions, product warranty and liability claims, goodwill impairment, international operations, and general economic cyclicality.
The company was in compliance with its debt covenants at January 2, 2016. It had approximately $2,321.4 million of contractual obligations, including $1,954.4 million of debt and estimated interest payments. The filing describes litigation involving motors manufactured before 2004 that were incorporated into third-party ventilation units alleged to have caused fires. Management did not believe the claims were material based on current facts, but acknowledged that potential remedial actions and costs could be significant.
Subsequent to year-end, on January 18, 2016, the company acquired the remaining 45% interest in Elco Group B.V. for $18.5 million, increasing ownership from 55% to 100%.
Investor verification points
- Verify the registrant and ticker identity: the filing is for Regal Beloit Corporation, while the request metadata identifies Regal Rexnord Corporation.
- Assess sustainable earnings excluding the $79.9 million goodwill impairment, $12.8 million Venezuelan write-off, purchase-accounting effects, restructuring costs, and acquisition expenses.
- Review PTS integration progress, segment profitability, expected synergies, and the preliminary nature of certain purchase-accounting estimates.
- Evaluate debt repayment requirements, floating-rate exposure, covenant headroom, and the company’s ability to reduce leverage using operating cash flow.
- Monitor the expected $9.7 million of future restructuring charges and whether projected savings are realized.
- Assess continued weakness in oil and gas, Asian, HVAC, and other cyclical end markets and its implications for sales, margins, and goodwill valuation.
- Review the Venezuelan wind-down, potential recoveries, and any remaining contract or litigation exposure.
- Confirm the treatment and materiality of product-liability claims, warranty reserves, pension obligations, and foreign tax or repatriation exposures.