Regal Beloit Corporation — Q2 2021 Form 10-Q Summary
Business context and reporting period
Regal Beloit Corporation, a global manufacturer of electric motors, electrical motion controls, power generation and power transmission products, reported results for the three and six months ended July 3, 2021. The company operated through Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions. The filing was dated August 11, 2021.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $886.9 million | $634.1 million | $1,701.0 million | $1,368.3 million |
| Gross profit | $251.5 million | $170.3 million | $496.9 million | $373.6 million |
| Gross margin | 28.4% | 26.9% | 29.2% | 27.3% |
| Operating income | $109.0 million | $45.9 million | $206.1 million | $115.9 million |
| Operating margin | 12.3% | 7.2% | 12.1% | 8.5% |
| Net income attributable to Regal Beloit | $79.6 million | $28.1 million | $145.2 million | $73.9 million |
| Diluted EPS | $1.94 | $0.69 | $3.54 | $1.81 |
| Operating cash flow | Not separately provided | Not separately provided | $136.6 million | $189.6 million |
Liquidity, debt and balance sheet
- Cash and equivalents were $618.5 million at July 3, 2021, compared with $611.3 million at January 2, 2021.
- Working capital was $1,145.4 million, versus $1,029.3 million at year-end; the current ratio was 2.2 to 1.
- Total debt was $1,019.9 million, including $230.9 million of current maturities and $789.0 million of long-term debt, down from $1,071.4 million at January 2, 2021.
- The $750.0 million revolving facility had no borrowings, $0.2 million of letters of credit outstanding and $749.8 million of available capacity at quarter-end.
- A $230.0 million senior note matured on July 14, 2021 and was paid using operating cash and a draw on the revolving facility.
- Cash used in investing activities was $26.3 million, including $24.3 million of capital expenditures. Cash used in financing activities was $102.1 million, including $50.2 million of debt repayments, $24.4 million of shareholder dividends and $17.0 million of financing fees.
Material changes versus the prior comparable period
- Second-quarter sales increased 39.9%, consisting of 37.2% organic growth and 2.7% favorable foreign-currency translation. Six-month sales increased 24.3%, consisting of 22.1% organic growth and 2.2% currency translation.
- Growth was broad-based and reflected stronger North American demand, a resurgence in China and recovering demand in EMEA and Asia Pacific. All four segments reported higher quarterly sales.
- Gross margin expanded 150 basis points in the quarter and 190 basis points for the six-month period, driven mainly by volume and mix, partly offset by higher freight, material and supply-chain costs.
- Operating expenses rose 14.5% in the quarter and 12.8% year to date, primarily due to Rexnord transaction due-diligence costs and higher wages and benefits. Operating margin nevertheless improved substantially.
- Operating cash flow declined $53.0 million year to date despite higher earnings, mainly because of increased receivables, inventory and prepaid expenses.
- No common stock was repurchased in the quarter or first six months, compared with $25.0 million of repurchases in the first six months of 2020.
Outlook, transactions, risks and unusual items
Management projected increased sales growth for the remainder of 2021, assuming no material deterioration in production capacity or commercial operations from COVID-19 or supply-chain disruptions. The outlook excludes costs, expenses and other effects of the proposed Rexnord transaction.
The company entered into a Reverse Morris Trust transaction to acquire Rexnord’s Process & Motion Control business. Closing remained subject to shareholder approvals and other conditions. A potential special dividend to Regal shareholders could range from zero to approximately $2.0 billion, and the transaction could require substantial additional financing. Land also entered into a $487.0 million delayed-draw term loan facility that could become subsidiary debt if the transaction closes.
- COVID-19 continues to pose risks to suppliers, employees, logistics, customers, demand and collections.
- Commodity inflation, freight costs and supply disruptions may pressure margins; the company uses pricing actions and commodity hedges to mitigate exposure.
- Other principal risks include customer concentration, cyclical end markets, product liability and warranty claims, litigation, cybersecurity, foreign currency and interest-rate volatility, and integration or financing risks related to Rexnord.
- The company recorded $2.3 million of asset impairments in the quarter and year to date related to assets transferred to held-for-sale status.
- Restructuring costs were $1.5 million in the quarter and $3.2 million year to date. The company expected approximately $3.5 million of additional charges on approved projects and approximately $16.0 million of total fiscal 2021 restructuring costs, excluding Rexnord-related costs.
- A subsidiary remains subject to numerous legacy product-liability claims involving sub-fractional motors allegedly associated with ventilation-unit fires. The company has accrued an estimated liability but stated that potential additional costs could be significant.
- The company was in compliance with its debt covenants, and management concluded that disclosure controls were effective.
Important facts for investors to verify
- Whether the Rexnord transaction closed, its final share issuance, special dividend, financing structure and resulting leverage.
- The actual post-quarter-end balance and cost of the revolving-facility draw used to fund the July 14, 2021 note maturity.
- Whether supply-chain, freight and commodity-cost pressures affected the projected second-half sales growth and margin outlook.
- Changes in working capital and operating cash conversion, particularly receivables and inventory levels.
- Developments, reserves and insurance coverage related to the legacy ventilation-unit product-liability claims.
- The impact of COVID-19, interest-rate changes, LIBOR replacement and foreign-currency and commodity hedging on future results.