Business Context and Reporting Period
Issuer: The supplied filing is for Regal Beloit Corporation, not “Regal Rexnord Corp.” Investors should verify the issuer identity before relying on this summary. This unaudited Form 10-Q covers the quarter ended September 28, 2013, and the nine months ended September 28, 2013, compared with September 29, 2012.
Regal Beloit operated through two reportable segments: Electrical and Mechanical. The company manufactures electric motors, power-generation products, mechanical motion-control products and related equipment.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $768.2 million | $779.5 million | $2,368.4 million | $2,451.3 million |
| Gross profit | $196.5 million | $192.6 million | $605.2 million | $610.3 million |
| Gross margin | 25.6% | 24.7% | 25.6% | 24.9% |
| Operating income | $78.8 million | $83.3 million | $235.8 million | $265.7 million |
| Operating margin | 10.3% | 10.7% | 10.0% | 10.8% |
| Net income attributable to Regal Beloit | $52.6 million | $54.3 million | $153.2 million | $165.7 million |
| Diluted EPS | $1.16 | $1.29 | $3.38 | $3.94 |
Q3 net sales declined 1.4%, while nine-month sales declined 3.4%. Q3 net income attributable to Regal Beloit decreased 3.1%; nine-month net income decreased 7.5%. Higher average diluted shares, 45.4 million versus 42.0 million in Q3 2012, also reduced EPS.
Q3 interest expense was $10.6 million and interest income was $1.3 million. Nine-month net interest expense was $28.8 million, down from $32.4 million. Effective tax rates were 21.6% in Q3 and 23.3% for nine months, compared with 24.5% and 27.4%, respectively, in the prior-year periods.
Segment Performance
- Electrical: Q3 sales were $707.5 million, down 0.1%; nine-month sales were $2,171.8 million, down 2.3%. Q3 operating income was $71.1 million, compared with $73.3 million.
- Mechanical: Q3 sales were $60.7 million, down 14.7%; nine-month sales were $196.6 million, down 13.8%. Weakness in oil and gas markets was the principal factor cited. Q3 operating income declined to $7.7 million from $10.1 million.
Cash Flow, Balance Sheet, Debt and Liquidity
| Metric | September 28, 2013 | December 29, 2012 |
|---|---|---|
| Cash and cash equivalents | $462.7 million | $375.3 million |
| Trade receivables | $481.9 million | $446.0 million |
| Inventories | $606.1 million | $557.0 million |
| Working capital | $997.4 million | $1,006.0 million |
| Current ratio | 2.4:1 | 2.9:1 |
| Total debt | $768.7 million | $818.5 million |
| Long-term debt | $609.1 million | $754.7 million |
- Nine-month operating cash flow was $238.5 million, down from $276.2 million, primarily because of increased working-capital requirements.
- Investing cash outflow was $72.4 million, including $65.4 million of capital expenditures and $6.4 million of acquisition spending.
- Financing cash outflow was $79.6 million, including repayment of the final $55.0 million term-loan balance and $26.1 million of shareholder dividends.
- The company had no borrowings under its $500.0 million revolving credit facility, $23.5 million of standby letters of credit, and $476.5 million of available capacity.
- The company reported compliance with all debt covenants. Senior notes outstanding totaled $750.0 million, including $150.0 million maturing in August 2014.
Material Changes Versus the Prior Comparable Period
- Sales weakened because of price reductions, lower volume and mix, foreign-currency effects, residential HVAC pressure, and oil-and-gas market weakness.
- Gross margin improved to 25.6% from 24.7% in Q3 and to 25.6% from 24.9% for nine months, despite lower sales.
- Operating expenses increased to 15.3% of sales in Q3 from 14.0% and to 15.6% for nine months from 14.1%, contributing to lower operating margins.
- Restructuring costs were $1.2 million in Q3 2013 and $2.7 million for nine months, compared with $2.8 million and $3.3 million in the prior-year periods. Nine-month 2013 operating expenses also included $3.2 million of acquisition due-diligence costs.
- The company acquired the RAM motor business in February 2013 and purchased additional shares of a South African joint venture in September 2013. Acquisition-related expenses were $3.2 million for the first nine months.
- Total debt declined primarily because the company repaid its $55.0 million term loan. Cash increased by $87.4 million during the first nine months.
- Accumulated other comprehensive loss increased to $84.7 million from $65.3 million, principally reflecting foreign-currency translation losses.
Guidance, Outlook, Risks and Unusual Items
Management described the near-term operating environment as challenging, citing uncertain U.S. economic conditions, reduced demand in commercial, industrial and power-generation markets, pricing competition, and customer supplier changes. Management expected residential HVAC revenue to be negatively affected by up to $20 million over the following three quarters, although new products, other customers and mix changes could offset some or all of the decline.
Key risks include restructuring execution and costs, competition, commodity prices, significant-customer concentration, supplier disruptions, acquisition integration, ERP implementation, foreign-currency movements, debt repayment, product liability and warranty claims, intellectual-property matters, litigation, global economic conditions and cyclical capital-goods demand.
- The company was subject to claims involving motors manufactured by an acquired subsidiary; management did not believe the claims would materially affect the consolidated financial statements.
- Interest-rate, currency and commodity exposures were managed through derivatives. Net AOCI hedging losses of $6.6 million were expected to be realized in earnings during the following twelve months.
- On October 29, 2013, after the quarter ended, the company announced an agreement to acquire Cemp s.r.l., an Italian flameproof electric-motor company. The filing does not provide transaction value or closing terms.
- Management stated that existing cash, operating cash flow, credit facilities and anticipated capital-market access were sufficient to fund U.S. operations and capital needs for at least the next twelve months.
Facts Investors Should Verify
- Confirm whether this filing belongs to Regal Beloit Corporation or the requested Regal Rexnord Corp.; the supplied document identifies Regal Beloit Corporation.
- Review the $150.0 million senior-note maturity scheduled for August 2014 and the company’s refinancing or repayment plans.
- Assess whether the projected residential HVAC revenue decline of up to $20 million materialized and whether new products or customer gains offset it.
- Monitor Mechanical segment exposure to oil and gas markets and the effect of continued weakness on margins.
- Reconcile operating cash-flow deterioration with higher receivables and inventories and the decline in the current ratio.
- Evaluate acquisition integration, contingent purchase-price obligations, the announced Cemp acquisition, and related financing needs.
- Review derivative valuations, foreign-currency exposure, commodity costs, interest-rate sensitivity and the realization of AOCI losses.