Regal Beloit Corporation (now identified in request metadata as Regal Rexnord) — 2015 Q2 Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended July 4, 2015, compared with the periods ended June 28, 2014. The filing identifies the registrant as Regal Beloit Corporation, not Regal Rexnord Corporation. Financial statements are unaudited and prepared under U.S. GAAP.
Business context and reporting period
The company operates through Commercial and Industrial Systems, Climate Solutions, and Power Transmission Solutions. The principal change during the period was the January 30, 2015 acquisition of Emerson Electric’s Power Transmission Solutions business for $1.408 billion in cash. PTS generated $149.0 million of second-quarter sales and $255.8 million of six-month sales.
Key financial metrics
| Metric | Three months ended July 4, 2015 | Three months ended June 28, 2014 | Six months ended July 4, 2015 | Six months ended June 28, 2014 |
|---|---|---|---|---|
| Net sales | $942.2 million | $850.4 million | $1,853.9 million | $1,651.6 million |
| Gross profit | $251.4 million | $211.0 million | $472.3 million | $405.4 million |
| Gross margin | 26.7% | 24.8% | 25.5% | 24.6% |
| Income from operations | $103.2 million | $87.7 million | $166.8 million | $157.4 million |
| Operating margin | 11.0% | 10.3% | 9.0% | 9.5% |
| Net income attributable to Regal Beloit | $62.8 million | $56.2 million | $99.2 million | $100.0 million |
| Diluted EPS | $1.39 | $1.24 | $2.20 | $2.20 |
- Second-quarter sales increased 10.8%; six-month sales increased 12.2%.
- Organic sales declined 5.5% in the quarter and 2.4% for the six months, while foreign-currency translation reduced sales by approximately 2.4% and 2.8%, respectively.
- Second-quarter interest expense increased to $16.4 million from $10.3 million, primarily because of debt incurred for the PTS acquisition.
- Effective tax rates were 26.0% for both the quarter and six months, compared with 26.5% and 26.4%, respectively, in the prior-year periods.
- Dividends declared were $0.23 per share in the quarter and $0.45 per share for the six months, versus $0.22 and $0.42 in the comparable periods.
Segment performance
| Segment | Q2 2015 sales | Q2 2015 operating margin | Six-month 2015 sales | Six-month 2015 operating margin |
|---|---|---|---|---|
| Commercial and Industrial Systems | $441.0 million | 9.4% | $897.4 million | 8.3% |
| Climate Solutions | $286.1 million | 15.3% | $566.5 million | 13.6% |
| Power Transmission Solutions | $215.1 million | 8.4% | $390.0 million | 3.8% |
Commercial and Industrial Systems and Climate Solutions experienced sales declines because of weaker oil and gas, China, and certain HVAC-related demand trends, as well as currency effects. Climate Solutions margins improved because of the simplification initiative and fewer operational inefficiencies. PTS contributed substantial acquired revenue but was affected by $7.1 million of purchase-accounting inventory step-up costs in the quarter and $20.7 million for the six months. PTS also incurred $29.8 million of purchase-accounting adjustments and transaction costs in six-month operating income.
Cash flow, liquidity, debt, and balance sheet
- Six-month operating cash flow was $135.7 million, down from $145.3 million, primarily because of lower net income and higher working capital supporting seasonal sales and PTS.
- Investing cash flow was negative $1.445 billion, including $1.4005 billion of business acquisitions and $44.7 million of capital expenditures.
- Financing cash flow was positive $1.225 billion, primarily from the $1.25 billion PTS term loan and net revolving-facility borrowings.
- Cash and cash equivalents were $247.6 million at July 4, 2015, down from $334.1 million at January 3, 2015. Approximately $244.5 million was held by foreign subsidiaries and could be subject to repatriation taxes.
- Working capital was $1.108 billion and the current ratio was 2.6:1, compared with $1.091 billion and 2.9:1 at fiscal year-end.
- Total debt was $1.893 billion, versus $633.8 million at January 3, 2015. The balance included $1.2188 billion of term debt, $600.0 million of senior notes, $53.0 million drawn on the multicurrency revolver, and $21.2 million of other debt.
- The $500.0 million multicurrency revolving facility had $416.3 million of available borrowing capacity after $53.0 million of borrowings and $30.7 million of standby letters of credit.
- The company was in compliance with all debt financial covenants as of July 4, 2015.
Material changes versus the prior comparable period
- The PTS acquisition materially increased sales, assets, goodwill, intangible assets, debt, interest expense, and amortization.
- Goodwill increased from $1.004 billion to $1.569 billion, including $570.0 million attributable to PTS. Net intangible assets increased from $202.3 million to $822.7 million.
- Total assets increased from $3.408 billion at January 3, 2015 to $4.965 billion at July 4, 2015.
- Foreign-currency translation losses and hedging losses reduced comprehensive income. Accumulated other comprehensive loss increased to $181.4 million from $151.0 million.
- Six-month net income attributable to Regal Beloit declined modestly to $99.2 million from $100.0 million, despite higher reported sales, reflecting acquisition costs, increased interest expense, and other acquisition-related effects.
- Restructuring charges were $2.2 million in the quarter and $3.4 million for the six months, compared with $3.6 million and $7.8 million, respectively. Approximately $5.4 million of additional charges were expected for previously announced restructuring activities, which were expected to conclude by the end of 2015.
Guidance, outlook, risks, and unusual items
Management expected 2015 net sales to increase, driven primarily by acquisition growth, and expected full-year EPS to increase because of the PTS acquisition and benefits from the simplification initiative. Management cautioned that organic growth would be challenged by declining oil and gas demand, weaker China sales, and adverse currency translation.
- Venezuela remained a significant operating risk. The company adopted the SIMADI exchange rate, recording a $1.5 million pretax devaluation charge in the first quarter. Net Venezuelan trade receivables were $10.7 million at July 4, 2015, and collection timing remained uncertain.
- PTS integration, purchase-accounting adjustments, transaction costs, and the ability to realize expected synergies were material execution risks.
- Higher debt levels increased exposure to interest rates and repayment requirements. Approximately $1.387 billion of debt was variable-rate debt before the interest-rate swap; a hypothetical 10% change in the weighted-average borrowing rate would have changed annualized after-tax earnings by approximately $1.5 million.
- Other principal risks included commodity prices, foreign exchange, customer concentration, supply disruptions, product liability and warranty claims, litigation, goodwill or intangible-asset impairment, cyclical capital-goods demand, and global economic conditions.
- The company had a $100.0 million interest-rate swap, currency forwards, and copper and aluminum hedges. Net accumulated other comprehensive loss included $17.9 million of deferred derivative losses expected to be realized in earnings within twelve months.
- Claims related to motors manufactured by an acquired subsidiary were outstanding, but management did not expect the claims to have a material effect on the interim financial statements.
- The company reported effective disclosure controls. Internal controls were being refined and harmonized for the acquired PTS business.
Important facts an investor should verify
- Confirm the corporate identity and filing chain: the supplied filing is for Regal Beloit Corporation, while the request metadata names Regal Rexnord.
- Assess PTS integration progress, sustainable margins, acquisition synergies, and the effect of purchase-accounting amortization and inventory step-ups.
- Reconcile the substantial increase in debt with operating cash generation, scheduled term-loan amortization, interest-rate exposure, and covenant requirements.
- Monitor organic sales trends in oil and gas, China, HVAC, and other cyclical end markets, separately from acquisition and currency effects.
- Evaluate cash availability, including the concentration of cash in foreign subsidiaries and potential repatriation taxes.
- Track Venezuelan receivable collections, currency controls, and potential further devaluation or write-downs.
- Review the estimated $5.4 million of remaining restructuring charges and whether simplification benefits offset related costs.
- Verify future goodwill and intangible-asset impairment sensitivity, particularly for the newly acquired PTS reporting unit.