Regal Beloit Corporation — Q3 2020 Form 10-Q Summary
Business context and reporting period
Regal Beloit Corporation manufactures electric motors, electrical motion controls, power generation and power transmission products through four segments: Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions. The filing covers the three and nine months ended September 26, 2020, compared with the comparable periods ended September 28, 2019. Results were materially affected by the COVID-19 pandemic, including weaker demand, production disruptions and supply-chain constraints.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $758.2 million | $772.3 million | $2,126.5 million | $2,499.8 million |
| Gross profit | $221.6 million | $201.9 million | $595.2 million | $670.5 million |
| Gross margin | 29.2% | 26.1% | 28.0% | 26.8% |
| Income from operations | $90.0 million | $72.8 million | $205.9 million | $289.4 million |
| Operating margin | 11.9% | 9.4% | 9.7% | 11.6% |
| Net income attributable to Regal | $65.0 million | $49.7 million | $138.9 million | $202.2 million |
| Diluted EPS | $1.60 | $1.19 | $3.41 | $4.75 |
| Operating cash flow | Not separately provided | Not separately provided | $309.9 million | $271.2 million |
Q3 sales declined 1.8%, while gross profit increased 9.8% and operating income increased 23.6%. Nine-month sales declined 14.9%, gross profit declined 11.2% and operating income declined 28.8%. The nine-month comparisons were affected by $45.2 million of divestiture gains recorded in 2019 that did not recur.
- Cash and cash equivalents were $487.5 million at September 26, 2020, compared with $331.4 million at December 28, 2019.
- Capital expenditures were $29.7 million for the first nine months, compared with $77.3 million in the prior-year period.
- Total debt was $1.071 billion, including $230.6 million of current maturities. Debt fair value was approximately $1.087 billion.
- The company had $499.8 million of available revolving-credit capacity, excluding $0.2 million of standby letters of credit, and was in compliance with its financial covenants.
- Working capital was $921.8 million and the current ratio was 2.1:1, compared with $1.047 billion and 2.9:1 at year-end 2019.
- Quarterly dividends were $0.30 per share; $36.5 million was paid to shareholders during the first nine months.
Material changes versus the prior comparable period
- Q3 revenue performance improved sequentially as order rates in August and September returned to positive year-over-year territory, although consolidated sales remained slightly below the prior year.
- Q3 gross margin improved to 29.2% from 26.1%, driven by favorable price realization, mix, supply-chain optimization, account pruning and prior cost actions.
- Commercial Systems sales increased 1.7%, and Climate Solutions sales increased 1.3%. Industrial Systems sales decreased 3.5%, while Power Transmission Solutions sales decreased 8.7%.
- For the first nine months, all segments reported lower sales. Climate Solutions declined 18.3%, Commercial Systems declined 15.6%, Power Transmission Solutions declined 12.7% and Industrial Systems declined 11.1%.
- Interest expense declined to $31.2 million from $40.5 million for the first nine months, primarily reflecting lower borrowing rates and debt levels.
- Share repurchases were reduced to $25.0 million from $150.1 million. The company suspended repurchases in the first quarter and reinstated the program beginning in the fourth quarter.
- Restructuring costs were $18.7 million for the first nine months, compared with $13.2 million in the prior-year period. Approved projects had approximately $8.9 million of remaining expected charges.
Guidance, outlook, risks and unusual items
Management expected fourth-quarter and full-year 2020 sales to decline from the prior year because of normal seasonality and continuing pandemic-related uncertainty. Management reported that manufacturing operations were generally operating closer to full capacity and that order rates had improved, but cautioned that COVID-19 cases, demand, supplier capacity, employee availability, logistics and customer liquidity could cause further disruption.
- Management estimated approximately $25.0 million of total restructuring costs for fiscal 2020.
- The global industrial motors reporting unit had $123.8 million of goodwill and less than 10% excess fair value over carrying value. Further deterioration in market conditions or performance could result in future impairment charges.
- The company had $230.0 million of senior notes maturing in July 2021 and planned to use revolving-credit capacity to repay them.
- Material exposures include COVID-19, cyclical capital-goods markets, commodity costs, foreign exchange, interest rates, LIBOR replacement, supply-chain disruptions, customer concentration, acquisitions and divestitures, cybersecurity, product liability and litigation.
- A subsidiary faces numerous claims involving historically manufactured sub-fractional motors allegedly associated with fires in third-party ventilation units. An estimated liability has been recorded, but the company cannot assure that the claims or potential regulatory actions will not have a material adverse effect on the subsidiary.
- The effective tax rate increased to 20.5% in Q3 and 21.7% for the first nine months, principally because China tax incentives expired in 2019 and due to the mix of earnings. The company applied for renewal of those incentives.
Most important facts for investors to verify
- Whether the improvement in Q3 orders and manufacturing utilization continued after the reporting date and translated into sustained organic sales growth.
- The timing and financing of the $230.0 million senior-note maturity in July 2021, including the effect on leverage and interest expense.
- Progress and total costs of restructuring, simplification, facility closures and COVID-19 cost-reduction actions.
- Whether the global industrial motors goodwill remains recoverable if demand or EBITDA margins weaken.
- The potential financial and regulatory exposure from legacy product-liability and fire-related claims.
- The impact of COVID-19, commodity prices, foreign exchange, LIBOR transition and supply-chain disruptions on future margins and liquidity.