Regal Beloit Corporation (now associated with Regal Rexnord) — Q1 2011 Form 10-Q Summary
The filing is for Regal Beloit Corporation, not a registrant named “Regal Rexnord Corporation.” It covers the three months ended April 2, 2011, with comparative results for the three months ended April 3, 2010. The interim financial statements are unaudited. The company operates in Electrical and Mechanical businesses serving global electric motor, power generation, and mechanical motion-control markets.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|
| Net sales | $662.7 million | $507.3 million | +30.6% |
| Gross profit | $164.8 million | $130.9 million | +25.9% |
| Gross margin | 24.9% | 25.8% | Down 90 basis points |
| Income from operations | $64.1 million | $62.8 million | +2.2% |
| Operating margin | 9.7% | 12.4% | Down 270 basis points |
| Net income | $40.8 million | $39.9 million | +2.4% |
| Net income attributable to Regal | $38.8 million | $37.8 million | +2.9% |
| Diluted EPS | $0.99 | $0.98 | +1.0% |
| Operating cash flow | $56.2 million | $44.4 million | +$11.8 million |
| Capital expenditures | $27.7 million | $11.2 million | +$16.5 million |
Segment Performance
| Segment | Q1 2011 Sales | Sales Growth | Q1 2011 Operating Income | Operating Margin |
|---|
| Electrical | $594.3 million | +30.0% | $55.5 million | 9.3% |
| Mechanical | $68.4 million | +36.5% | $8.6 million | 12.6% |
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $259.5 million at April 2, 2011, compared with $174.5 million at January 1, 2011. Trading securities declined from $56.3 million to zero.
- Working capital was $714.0 million, up from $688.7 million; the current ratio was 2.6:1 versus 2.7:1 at year-end 2010.
- Total debt was approximately $450.0 million, including $250.0 million of senior notes, a $165.0 million term loan, $2.8 million drawn on the revolving facility, and $32.1 million of other debt.
- Long-term debt was $430.8 million and current maturities were $19.2 million.
- The company had a $500.0 million revolving credit facility maturing in April 2012 and stated that it complied with all debt covenants at April 2, 2011.
- Net cash increased $84.9 million during the quarter. Investing cash flow was positive $19.7 million, primarily because of $56.0 million of investment-security sales, partially offset by capital expenditures and $8.6 million of acquisition spending.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected $91.2 million of incremental revenue from businesses acquired in 2010, higher volumes, selling-price increases, and a 1.0% favorable foreign-currency impact.
- North American residential HVAC motor sales increased 17.9%, while commercial and industrial sales increased 12.8%. High-efficiency products represented 18.0% of sales versus 17.7% in Q1 2010.
- Gross margin declined because of higher raw-material costs, particularly in the Electrical segment, where margin fell to 24.5% from 25.6%.
- Operating expenses increased $32.5 million, including $20.1 million from acquired businesses and $5.1 million of incremental acquisition-related expenses. Intangible amortization related to acquired businesses was $2.4 million.
- Electrical operating margin fell to 9.3% from 12.3%, while Mechanical operating margin was broadly stable at 12.6% versus 12.8%.
- Net interest expense increased to $4.8 million from $4.4 million, primarily because of lower investment income.
- The company acquired Hargil Dynamics in Australia on March 7, 2011 and acquired Ramu, a switched-reluctance motor technology company, on April 5, 2011, after quarter-end.
- Accumulated other comprehensive income improved to $9.3 million from a $1.7 million loss at year-end 2010, primarily due to currency translation adjustments.
Outlook, Commentary, Risks, and Unusual Items
- Management described continued economic growth and above-average demand for high-efficiency products, supported in part by energy-efficiency regulations and tax incentives. No quantitative earnings or sales guidance was provided in the filing text.
- The company planned to acquire A.O. Smith’s Electrical Products Company for $700 million in cash and 2,834,026 Regal shares. Regulatory approvals were still pending. Management expected to fund the cash consideration with existing cash, revolver borrowings, and additional debt.
- Key risks include raw-material and commodity-price inflation, competition, dependence on significant customers and suppliers, acquisition integration, foreign currency and interest-rate exposure, higher debt levels, cyclical capital-goods demand, product liability, intellectual-property litigation, and difficulties managing foreign operations.
- Following the March 2011 earthquake and tsunami in Japan, the company identified possible supply disruption involving microchips, capacitors, and capacitor film. Management did not foresee a material impact at the filing date but warned that shortages could reduce production or delay customer orders.
- Nordyne patent litigation continued after a court ruled that some patent claims were indefinite and invalid; other claims remained in litigation. The company did not believe the matter would materially affect financial results, but it could not predict the outcome of certain acquired-business fire-related claims.
- Commodity, currency, and interest-rate derivatives were used for hedging rather than speculation. Commodity hedge notional amounts included $138.1 million of copper contracts, and interest-rate swaps had total notional value of $250.0 million.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Regal Beloit Corporation and predates the Regal Rexnord name.
- Assess whether margin pressure from raw-material inflation and acquisition-related costs was temporary or structurally persistent.
- Review financing requirements and covenant capacity for the proposed $700 million cash acquisition, including the resulting leverage and interest burden.
- Verify the closing status, purchase accounting, and subsequent financial contribution of the A.O. Smith Electrical Products acquisition.
- Monitor Japanese component availability, commodity prices, and the effectiveness of related hedges.
- Evaluate litigation exposure, particularly the Nordyne patent matter and acquired-business fire-related claims, for potential outcomes beyond management’s current assessment.
- Consider the quality of cash growth: operating cash flow improved, but the substantial increase in cash also reflected investment-security sales.
