Business Context and Reporting Period
This unaudited Form 10-Q was filed by Regal Beloit Corporation, not Regal Rexnord Corporation as stated in the request metadata. The report covers the quarter and six months ended June 29, 2013, compared with June 30, 2012, and the balance sheet as of June 29, 2013, compared with December 29, 2012.
The company operated through two reportable segments: Electrical and Mechanical. It acquired the RAM motor business from Schneider Electric on February 8, 2013.
Key Financial Metrics
| Metric | Three months ended June 29, 2013 | Three months ended June 30, 2012 | Six months ended June 29, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Net sales | $822.0 million | $863.9 million | $1,600.2 million | $1,671.8 million |
| Gross profit | $209.2 million | $220.1 million | $408.7 million | $417.7 million |
| Gross margin | 25.5% | 25.5% | 25.5% | 25.0% |
| Operating income | $81.1 million | $103.3 million | $157.0 million | $182.4 million |
| Operating margin | 9.9% | 12.0% | 9.8% | 10.9% |
| Net income attributable to Regal Beloit | $51.1 million | $62.7 million | $100.6 million | $111.4 million |
| Diluted EPS | $1.13 | $1.49 | $2.22 | $2.65 |
| Operating cash flow | Not separately provided | Not separately provided | $157.3 million | $204.4 million |
Second-quarter sales declined 4.9% and six-month sales declined 4.3%. Net income attributable to the company declined 18.5% in the quarter and 9.7% year to date. The diluted share count increased to 45.3 million from 42.0 million in both comparable periods, further reducing EPS.
At June 29, 2013, cash and cash equivalents were $414.4 million, working capital was $1,093.9 million, and the current ratio was 2.9 to 1. Total debt was $768.6 million, including $750.0 million of senior notes, $3.0 million drawn on the revolving facility, and $15.6 million of other debt. Gross debt less cash was approximately $354.2 million.
The company had $474.4 million of available borrowing capacity under its $500.0 million revolving credit facility, after $22.6 million of standby letters of credit. It was in compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Electrical segment sales decreased 3.9% in the quarter and 3.4% year to date; Mechanical segment sales decreased 14.4% and 13.3%, respectively.
- Excluding recently acquired businesses, second-quarter sales decreased 5.7%, reflecting approximately 0.7% price decreases, 4.3% unfavorable volume and mix, and 0.7% unfavorable foreign currency translation.
- Weak commercial and industrial demand, softness in oil and gas markets, and a major customer’s decision to stop producing certain compressor platforms affected sales.
- Operating expenses increased to 15.6% of sales in the quarter from 13.5%, including $2.9 million of acquisition due diligence costs and $0.4 million of restructuring charges. Six-month operating expenses included $3.2 million of due diligence costs and $0.8 million of restructuring charges.
- Gross margin was flat in the quarter and improved year to date, but Electrical gross profit included a $3.6 million adverse impact from higher inventory costs related to Venezuelan currency devaluation. Mechanical margin declined to 25.8% from 28.4% in the quarter.
- Operating cash flow decreased by $47.1 million year to date, primarily because of increased working capital. Investing cash usage improved because acquisitions declined to $6.0 million from $95.3 million in the prior-year period.
- The company repaid the final $55.0 million of its term loan in the second quarter. Total debt declined from $818.5 million at year-end 2012 to $768.6 million.
- The effective tax rate declined to 25.0% from 30.5% in the quarter and to 24.1% from 28.7% year to date, reflecting tax integration benefits, foreign tax rates, and technology and research-related incentives.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide explicit numerical full-year earnings or revenue guidance. Management stated that near-term operating conditions remained challenging because of uncertain economic conditions, weak commercial, industrial, and power-generation demand, and competitive pricing and technology pressures.
Management expected customer changes and market dynamics to limit or reduce organic HVAC revenue by approximately $25 million over the next four quarters, although new customers, products, and mix could offset some or all of the decline. Management also reported stronger demand in residential HVAC markets as the U.S. housing market recovered.
On July 9, 2013, after the reporting period, the company announced that it would cease operations at its Springfield, Missouri manufacturing facility, affecting approximately 330 employees. Manufacturing will be transferred to U.S. and Mexican facilities over 18 months, with expected restructuring expenses of approximately $12.9 million.
Key risks include cyclical capital-goods demand, commodity and foreign-exchange volatility, customer concentration, supplier disruptions, acquisition integration, ERP implementation, restructuring execution, product liability and warranty claims, intellectual-property matters, debt repayment, foreign operations, and litigation. The company stated that certain acquired-subsidiary fire-related claims and other litigation were not expected to have a material effect, although outcomes cannot be assured.
The company hedged commodity, currency, and interest-rate exposures. Commodity hedge notional amounts were $156.4 million for copper and $8.9 million for aluminum. Interest-rate swaps had aggregate notional value of $250.0 million. Accumulated other comprehensive loss was $100.2 million at June 29, 2013, including significant foreign-currency and hedge-related losses.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Regal Beloit Corporation, while the request identifies Regal Rexnord Corp.
- Assess whether the expected $25 million HVAC organic revenue reduction and the Springfield facility closure are reflected in subsequent results and guidance.
- Review the timing and financial impact of the estimated $12.9 million Springfield restructuring program.
- Monitor sales and margins in the Electrical segment, Mechanical segment, residential HVAC, and oil and gas end markets.
- Evaluate working-capital trends, particularly receivables and inventories, given the year-to-date decline in operating cash flow.
- Review refinancing requirements for the $150.0 million floating-rate senior notes maturing in August 2014 and exposure to LIBOR and other interest-rate changes.
- Track commodity, currency, and Venezuelan currency-devaluation impacts, including hedge losses expected to enter earnings.
- Verify the resolution and financial exposure of product-liability, warranty, environmental, and other litigation matters.