Regal Beloit Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 3, 2015, compared with September 27, 2014; balance-sheet comparisons are to January 3, 2015. The filing identifies the registrant as Regal Beloit Corporation, not Regal Rexnord Corporation.
Business Context and Reporting Period
The company operates through Commercial and Industrial Systems, Climate Solutions, and Power Transmission Solutions. The January 30, 2015 acquisition of Emerson Electric’s Power Transmission Solutions business materially changed the company’s scale, segment mix, assets, and leverage.
Financial Performance and Key Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $882.3 million | $829.8 million | $2,736.2 million | $2,481.4 million |
| Gross profit | $241.1 million | $203.8 million | $713.4 million | $609.2 million |
| Gross margin | 27.3% | 24.6% | 26.1% | 24.6% |
| Income from operations | $100.1 million | $74.7 million | $266.9 million | $232.1 million |
| Operating margin | 11.4% | 9.0% | 9.8% | 9.4% |
| Net income attributable to Regal | $63.4 million | $47.5 million | $162.6 million | $147.5 million |
| Diluted EPS | $1.41 | $1.05 | $3.61 | $3.25 |
- Q3 sales increased 6.3%; nine-month sales increased 10.3%.
- Q3 gross profit increased 18.4% and operating income increased 34.0%. Nine-month gross profit increased 17.1% and operating income increased 15.0%.
- Q3 interest expense increased to $15.1 million from $9.8 million; nine-month interest expense increased to $45.1 million from $30.5 million, primarily because of acquisition-related borrowing.
- Effective tax rates were 25.2% for Q3 and 25.7% for the first nine months, compared with 27.1% and 26.6%, respectively, in the prior-year periods.
- Quarterly cash dividends declared were $0.23 per share, compared with $0.22; nine-month dividends were $0.68 per share, compared with $0.64.
Cash Flow, Liquidity, and Debt
- Operating cash flow was $267.2 million for the first nine months, up from $227.1 million.
- Investing cash flow was $(1,464.0) million, including $1,400.7 million for acquisitions and $65.4 million of capital expenditures.
- Financing cash flow was $1,124.0 million, principally reflecting $1,250.0 million of term borrowings used to finance the PTS acquisition.
- Cash declined to $254.6 million from $334.1 million at January 3, 2015. Working capital was $1,104.9 million and the current ratio was 2.6:1, compared with 2.9:1.
- Total debt was $1,813.7 million, compared with $633.8 million at year-end 2014. Debt consisted primarily of a $1.25 billion term facility, $600.0 million of senior notes, and $19.6 million of other borrowings.
- The company had $451.1 million of available borrowing capacity under its $500.0 million multicurrency revolving facility after $16.0 million of borrowings and $32.9 million of standby letters of credit. The company was in compliance with all debt covenants.
- Foreign subsidiaries held $249.8 million of cash, which could be subject to repatriation taxes if used in U.S. operations.
Material Changes Versus the Prior Comparable Period
- PTS contributed $128.9 million of Q3 sales and $384.7 million of nine-month sales. PTS operating income was $10.7 million in Q3 and $7.7 million for the nine months, after $29.8 million of purchase accounting adjustments and transaction costs for the nine-month period.
- Reported sales growth was acquisition-driven: Q3 acquisition growth was 15.2%, offset by a 5.9% organic decline and a 3.0% adverse currency impact. Nine-month acquisition growth was 16.7%, offset by a 3.5% organic decline and a 2.9% currency impact.
- Commercial and Industrial Systems sales declined 9.6% in Q3 and 5.7% for the nine months. Climate Solutions sales declined 8.8% and 5.4%, respectively. PTS sales increased 183.3% in Q3 and 193.5% for the nine months.
- Gross margin benefited from simplification programs, lower commodity costs, and $4.9 million of retroactive Generalized System of Preferences tariff refunds, including $3.8 million attributable to 2013 and 2014.
- Goodwill increased to $1,564.0 million from $1,004.0 million and intangible assets increased to $804.9 million from $202.3 million, primarily due to the PTS acquisition.
- Accumulated other comprehensive loss increased to $(233.2) million from $(151.0) million, driven largely by foreign-currency translation and hedging losses.
Outlook, Risks, Contingencies, and Unusual Items
- Management expected 2015 sales to increase primarily from acquisitions and expected 2015 EPS to increase due to PTS and the simplification initiative.
- Management identified declining oil and gas demand, weaker Asian sales, adverse currency translation, and challenging organic growth as headwinds.
- Restructuring charges were $4.6 million for the first nine months, with $2.1 million accrued at October 3, 2015. The company expected current restructuring activities to conclude by the end of 2016 and disclosed approximately $12.2 million of future charges.
- Venezuela remained exposed to currency controls, import and payment restrictions, price and labor controls, and collection delays. Net Venezuelan trade receivables were $9.0 million; a $1.5 million pretax devaluation charge was recorded in Q1, with no material Q3 devaluation charge.
- The company reported $49.3 million of net hedging losses in accumulated other comprehensive loss, including $28.5 million expected to be recognized in earnings within twelve months.
- Material risk factors include acquisition integration and purchase accounting, elevated debt and floating interest rates, commodity costs, foreign exchange, cyclical capital-goods demand, customer and supplier concentration, product liability and warranty claims, intellectual property matters, impairment risk, and Venezuelan operations.
- The filing states that pending litigation, including claims involving sub-fractional motors and alleged fires, was not expected to have a material effect on the interim financial statements.
Investor Verification Checklist
- Verify the sustainability of reported margin improvement after excluding the $4.9 million tariff refund and acquisition-related purchase accounting effects.
- Assess PTS organic sales, operating performance, integration progress, and the remaining purchase accounting and amortization burden.
- Monitor debt reduction, required term-loan amortization, interest-rate exposure, covenant headroom, and available revolving capacity.
- Reconcile reported growth with organic declines in Commercial and Industrial Systems and Climate Solutions.
- Evaluate working-capital trends, inventory growth, foreign-held cash, and operating cash conversion.
- Track Venezuela receivable collections, exchange-rate changes, and potential devaluation or loss-of-control consequences.
- Review the $12.2 million of estimated future restructuring charges and the effect of currency and hedge losses on future earnings.