Business Context and Reporting Period
This filing is Regal Beloit Corporation’s Form 10-K for the 52-week fiscal year ended January 1, 2011. The filing identifies the registrant as Regal Beloit Corporation, not Regal Rexnord Corporation. The company manufactures electric motors, controls, generators, and mechanical motion-control products through two segments: Electrical and Mechanical.
Fiscal 2010 included six acquisitions, primarily in the Electrical segment, and the company operated globally across the United States, Mexico, China, India, Australia, Europe, and other markets. The company had approximately 18,500 employees and backlog of $340.2 million at year-end, compared with $264.7 million at January 2, 2010.
Key Financial Metrics
| Metric | Fiscal 2010 | Fiscal 2009 | Change |
|---|---|---|---|
| Net sales | $2,238.0 million | $1,826.3 million | 22.5% increase |
| Gross profit | $549.4 million | $424.2 million | 29.5% increase |
| Gross margin | 24.5% | 23.2% | 130 basis-point increase |
| Income from operations | $237.7 million | $159.5 million | 48.9% increase |
| Operating margin | 10.6% | 8.7% | 190 basis-point increase |
| Net income attributable to Regal Beloit | $149.4 million | $95.0 million | 57.2% increase |
| Diluted EPS | $3.84 | $2.63 | 46.0% increase |
| Operating cash flow | $175.4 million | $314.9 million | 44.3% decrease |
| Capital expenditures | $45.0 million | $33.6 million | Increase |
| Long-term debt | $428.3 million | $468.1 million | Decrease |
Electrical segment sales were $2,002.0 million, up 22.3%, and operating income was $210.2 million, compared with $144.9 million in 2009. Mechanical segment sales were $236.0 million, up 25.1%, and operating income was $27.5 million, compared with $14.6 million in 2009.
Cash and cash equivalents were $174.5 million, compared with $262.4 million in 2009. Trading investments were $56.3 million, producing total cash and investments of approximately $230.9 million. Working capital was $688.7 million and the current ratio was 2.7:1. The company had $454.2 million of available borrowing capacity under its $500.0 million revolving credit facility.
Total debt was approximately $436.9 million, including $250.0 million of senior notes, a $165.0 million term loan, and $21.9 million of other debt. The company was in compliance with its debt covenants; debt to EBITDA was approximately 1.4:1 versus a maximum of 3.75:1, and interest coverage was approximately 16.3:1 versus a minimum of 3.0:1.
The company paid $25.1 million of dividends during fiscal 2010 and declared $0.67 per share in dividends. It reported total assets of $2.45 billion, shareholders’ equity attributable to Regal Beloit of $1.36 billion, and goodwill of $775.4 million.
Material Changes Versus the Prior Comparable Period
- Sales recovered strongly from the 2009 downturn, supported by higher volumes, product price increases, improving industrial demand, new products, and acquisitions.
- Fiscal 2010 sales included $119.5 million of incremental revenue from businesses acquired during the year. Acquisitions included CMG, Air-Con, Rotor, Elco, South Pacific Rewinders, and Unico.
- Gross margin improved despite higher copper, steel, aluminum, energy, and other input costs. Benefits came from volume, pricing, cost reductions, plant consolidations, and a higher-efficiency product mix.
- Operating expenses increased to $311.6 million from $264.7 million, including $28.4 million related to acquired businesses and $6.6 million of acquisition and diligence costs.
- Operating cash flow declined substantially because receivables, inventory, and accounts payable collectively used $62.3 million of cash, compared with providing $96.2 million in 2009.
- Investing cash outflows increased to $194.7 million, driven by $211.9 million of acquisition spending and $45.0 million of capital expenditures.
- The final $39.2 million of convertible notes was converted or redeemed during fiscal 2010; no convertible notes remained outstanding at year-end. Approximately 0.9 million shares were issued for the conversion premium.
- Goodwill increased from $663.9 million to $775.4 million, primarily from acquisitions and currency translation. The 2010 impairment testing did not identify an impairment charge.
- Non-U.S. sales rose to 31.6% of consolidated sales from 26.9%, and Asia-based sales increased 55.3%.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expected the near-term operating environment to remain challenging because of global economic uncertainty and continued increases in copper, steel, aluminum, energy, and other commodity costs. Management stated that fiscal 2011 capital expenditures were expected to be approximately $90.0 million, including the purchase of a factory in Faridabad, India and the construction or relocation of two factories in China.
The company entered into an agreement to acquire A.O. Smith’s Electrical Products Company for total consideration of $875 million, consisting of $700 million in cash and $175 million in Regal Beloit shares. The transaction was expected to generate $30 million to $40 million of synergies over three to four years. Regulatory approvals remained pending, and the Department of Justice issued a second request for information on February 4, 2011. The company planned to fund the cash consideration with existing cash, revolver borrowings, and additional debt.
Key risks include commodity-price inflation, global competition, customer concentration in HVAC motors, supply-chain disruptions, acquisition integration, increased leverage following the EPC transaction, variable interest rates, foreign currency exposure, cyclical industrial demand, international operations, product liability, warranty and fire-related claims, intellectual-property litigation, goodwill impairment, pension underfunding, tax matters, and implementation of a global ERP system.
In litigation involving Nordyne and the company’s ECM patent, a February 2011 claim-construction ruling found certain patent claims indefinite and invalid, while other claims remained in litigation. Management did not currently expect a material financial impact. Separately, claims involving sub-fractional motors used in ventilation units could require significant remedial costs, although management did not believe a material adverse effect was probable based on facts then available.
The company used commodity, foreign-currency, and interest-rate derivatives as cash-flow hedges. Net of swaps, $266.4 million of debt was fixed rate and $170.5 million was variable rate at year-end. The company reported a defined-benefit pension funded-status liability of $52.7 million and contractual obligations totaling $858.1 million, including debt, interest, operating leases, pension obligations, and firm purchase commitments.
Most Important Facts an Investor Should Verify
- Confirm the filing entity and corporate name: the document is for Regal Beloit Corporation for fiscal 2010, not a filing labeled Regal Rexnord Corporation.
- Assess whether the strong sales and earnings recovery was organic or acquisition-driven, including the $119.5 million of acquired-company revenue.
- Evaluate the sustainability of the 24.5% gross margin given rapidly rising commodity costs and the company’s ability to pass through price increases.
- Reconcile the sharp decline in operating cash flow with reported net income and review inventory and receivables growth.
- Assess financing capacity, covenant headroom, and pro forma leverage if the $875 million EPC acquisition closes.
- Monitor the Department of Justice review and any divestiture, delay, termination, or integration risks related to the EPC transaction.
- Review goodwill of $775.4 million and other acquisition-related intangible assets for impairment sensitivity.
- Review the Nordyne patent litigation and product-related fire claims for changes in expected exposure or required remediation.
- Consider pension underfunding, derivative fair values, foreign currency exposure, and the company’s planned increase in fiscal 2011 capital spending.