Regal Beloit Corporation (now Regal Rexnord) — 2018 Q1 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2018, compared with the three months ended April 1, 2017. Regal Beloit manufactured electric motors, electrical motion controls, power generation and power transmission products through three segments: Commercial and Industrial Systems, Climate Solutions, and Power Transmission Solutions.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $878.8 million | $813.5 million | +8.0% |
| Gross profit | $234.9 million | $215.5 million | +9.0% |
| Gross margin | 26.7% | 26.5% | +20 basis points |
| Income from operations | $88.2 million | $75.0 million | +17.6% |
| Operating margin | 10.0% | 9.2% | +80 basis points |
| Net income attributable to Regal Beloit | $58.4 million | $46.3 million | +26.1% |
| Diluted EPS | $1.31 | $1.02 | +28.4% |
| Operating cash flow | $42.5 million | $50.5 million | -$8.0 million |
| Capital expenditures | $19.3 million | $17.0 million | +$2.3 million |
Net income was $59.3 million, including $0.9 million attributable to noncontrolling interests. The effective tax rate declined to 21.0% from 22.5%, primarily reflecting the Tax Cuts and Jobs Act and earnings mix. Cash dividends declared increased to $0.26 per share from $0.24.
At March 31, 2018, cash and cash equivalents were $169.9 million, working capital was $972.9 million, and the current ratio was 2.4:1. Total debt was $1.182 billion, including $100.8 million of current maturities and $1.082 billion of long-term debt. Revolver borrowings were $60.8 million, with $434.1 million of available borrowing capacity and $5.1 million of outstanding letters of credit. The company was in compliance with all debt covenants.
Material changes versus the prior comparable period
- Sales growth included 5.8% organic growth and a 2.2% favorable foreign-currency translation effect.
- Commercial and Industrial Systems sales increased 8.6%, Climate Solutions sales increased 4.9%, and Power Transmission Solutions sales increased 11.0%.
- Power Transmission Solutions operating margin improved substantially to 13.1% from 9.7%, while Commercial and Industrial Systems improved to 7.0% from 6.7%. Climate Solutions declined modestly to 12.4% from 12.7%.
- Gross margin benefited from higher volume but was partly offset by commodity inflation. Operating expenses increased 4.4%, but declined as a percentage of sales to 16.7% from 17.3% due to operating leverage.
- Operating cash flow declined because of increased investment in working capital, including higher receivables and inventories.
- The company repurchased 351,000 shares for $26.0 million and paid $11.5 million in dividends. Financing cash flow was positive $2.1 million versus negative $60.3 million in the prior-year quarter, primarily because of net borrowing activity.
- Restructuring costs declined to $1.7 million from $3.2 million. Management expected approximately $5.2 million of additional restructuring charges, including $1.0 million of employee termination costs and $4.2 million of facility-related and other costs.
Guidance, outlook, risks and unusual items
Management reported positive order trends and continued to expect low single-digit organic sales growth for fiscal 2018. The filing does not provide a specific full-year earnings or cash-flow forecast.
On April 10, 2018, the company acquired Nicotra Gebhardt S.p.A. for a preliminary purchase price of $154 million. The acquisition was funded with available cash and approximately $88 million of new revolver borrowings; purchase accounting was incomplete at the filing date.
The company recorded provisional effects of the Tax Cuts and Jobs Act in 2017, including a $40.0 million transition-tax expense payable over eight years. The company was still evaluating GILTI accounting and noted that final tax effects could differ materially from provisional estimates.
Key risks include commodity inflation, foreign-exchange and interest-rate volatility, global manufacturing and supply-chain disruptions, cyclical capital-goods demand, competition, acquisition integration, restructuring execution, debt repayment, product liability and warranty claims, intellectual-property matters, cybersecurity, and potential impairment of goodwill or intangible assets. A subsidiary faces claims involving older sub-fractional motors allegedly associated with ventilation-unit fires; the company has recorded an estimated liability but cannot predict the ultimate costs or outcome.
The company adopted ASC 606 revenue guidance using the modified retrospective method with no material cumulative adjustment or material impact on reported results. It also adopted updated pension-cost presentation guidance. New lease and derivative accounting standards were not yet fully adopted, and the company was evaluating their effects.
Important facts for investors to verify
- Confirm the effect of the Nicotra Gebhardt acquisition on leverage, segment results, purchase accounting and full-year guidance.
- Monitor the $100.0 million senior-note maturity due July 2018 and the company’s post-acquisition revolver borrowings.
- Assess whether commodity inflation is fully recovered through pricing and whether gross-margin expansion is sustainable.
- Review working-capital trends, particularly receivables and inventories, given the decline in operating cash flow.
- Track restructuring charges, expected savings and execution of facility-consolidation initiatives.
- Evaluate potential exposure from product-liability claims, warranty obligations and other contingencies.
- Confirm the final accounting for the Tax Cuts and Jobs Act, GILTI and subsequent accounting-standard adoptions.