Business Context and Reporting Period
Regal Beloit Corporation filed this unaudited Form 10-Q for the three months ended March 30, 2013. The filing identifies the registrant as Regal Beloit Corporation, although the request metadata refers to REGAL REXNORD CORP. The company reported two segments: Electrical and Mechanical, serving electric motor, power generation, mechanical motion control, HVAC, commercial, industrial and residential markets.
The company acquired the RAM motor business from Schneider Electric on February 8, 2013. The business manufactures hermetic motors for commercial HVAC applications and is included in the Electrical segment.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $778.2 million | $807.9 million | Down 3.7% |
| Gross profit | $199.5 million | $197.6 million | Up 1.0% |
| Gross margin | 25.6% | 24.5% | Up 110 basis points |
| Income from operations | $75.9 million | $79.1 million | Down 4.0% |
| Operating margin | 9.8% | 9.8% | Unchanged |
| Net income | $50.7 million | $49.9 million | Up 1.6% |
| Net income attributable to Regal Beloit | $49.5 million | $48.7 million | Up 1.6% |
| Diluted EPS | $1.09 | $1.16 | Down 6.0% |
| Net interest expense | $9.9 million | $11.4 million | Down $1.5 million |
| Effective tax rate | 23.2% | 26.3% | Down 310 basis points |
| Operating cash flow | $66.0 million | $68.5 million | Down $2.5 million |
Electrical segment sales were $711.0 million, down 3.4%, and Mechanical segment sales were $67.2 million, down 6.7%. High-efficiency product sales increased 3.5% and represented 19.6% of total sales.
At March 30, 2013, cash and cash equivalents were $411.9 million, working capital was $1,051.3 million, and the current ratio was 2.7:1. Total debt was $822.2 million, comprising $750.0 million of senior notes, a $55.0 million term loan and $17.2 million of other debt. The company had no borrowings under its $500.0 million revolving credit facility, $477.3 million of available capacity after standby letters of credit, and was in compliance with its debt covenants.
Capital expenditures were $20.6 million, acquisition spending was $6.0 million, and net cash used in investing activities was $26.8 million. Net cash used in financing activities was $3.0 million, including $8.5 million of dividends paid. Cash increased by $36.6 million to $411.9 million during the quarter.
Material Changes Versus the Prior Comparable Period
- Sales declined $29.7 million, reflecting approximately 4.7% lower sales excluding acquisitions, including negative effects from volume and mix, pricing and foreign currency translation.
- Recently acquired businesses contributed $8.0 million of incremental sales, including $4.6 million in Electrical and $3.4 million in Mechanical.
- Commercial and industrial motor sales, excluding acquisitions, declined 6.7%, while North American residential HVAC motor sales increased 3.5%.
- Gross margin improved from 24.5% to 25.6%, partly because Q1 2012 included $0.5 million of Milwaukee Gear purchase accounting inventory adjustments. Q1 2013 included $0.5 million of restructuring costs.
- Operating expenses increased from $118.5 million to $123.6 million and included $0.4 million of restructuring charges, higher acquisition-related costs and expenses from recently acquired businesses.
- Net income increased modestly, but diluted EPS declined because average diluted shares increased to 45.3 million from 42.0 million.
- Operating cash flow decreased modestly, while investing cash outflows fell substantially because Q1 2012 included $93.0 million of acquisition spending, primarily for Milwaukee Gear.
- The effective tax rate declined primarily because of completion of tax integration for the EPC acquisition and retroactive reinstatement of the 2012 U.S. Research and Development Credit.
Outlook, Commentary, Risks and Unusual Items
Management described the near-term operating environment as challenging because of global economic uncertainty and slower growth. The company reported recent sales declines in commercial, industrial and power-generation applications. It expects competitive conditions in residential and commercial HVAC markets to limit or reduce organic HVAC revenue growth by approximately $40 million over the following four quarters, although new products, other customers and mix changes could offset part or all of the decline.
Key risks include competitive pressure, commodity and raw-material costs, dependence on significant customers and suppliers, foreign exchange and interest rates, cyclical capital-goods demand, integration of acquisitions, product liability and warranty claims, intellectual-property matters, litigation, and the company’s ability to service debt.
The $55.0 million term loan matured in June 2013. The company had $67.7 million of current debt maturities at quarter-end. Floating-rate debt and interest-rate swaps expose results to LIBOR movements; net of swaps, variable-rate debt was $320.2 million.
The company hedges commodity, currency and interest-rate exposures. Commodity hedge notional amounts were $154.8 million for copper and $8.8 million for aluminum. Foreign-currency hedge notional amounts included $168.8 million of Mexican pesos and $86.3 million of Chinese renminbi. The company does not hedge translation exposure from foreign subsidiaries.
Contingent matters include claims involving sub-fractional motors manufactured primarily through 2004 and included in third-party ventilation units. Management did not expect these claims, individually or collectively, to have a material effect on the interim consolidated financial statements. The filing states that there were no material changes to previously disclosed legal proceedings or risk factors.
The company changed the inventory valuation method for finished goods of recently acquired North American businesses from FIFO to LIFO. The cumulative and prior-period effects were considered immaterial. Shareholders subsequently approved a 2013 Equity Incentive Plan authorizing 3.5 million shares for equity awards.
Important Facts for Investors to Verify
- Confirm the issuer identity: the filing is for Regal Beloit Corporation, not an entity named Regal Rexnord Corporation.
- Verify the expected refinancing or repayment of the $55.0 million term loan maturing in June 2013 and the treatment of current debt maturities.
- Monitor the projected approximately $40 million HVAC organic revenue headwind and whether new products or customer gains offset it.
- Assess whether sales declines in commercial, industrial and power-generation markets persist and whether margins remain near 9.8% operating margin.
- Review the impact of higher share count on EPS and future dilution from the approved 2013 Equity Incentive Plan.
- Evaluate exposure to copper, aluminum, foreign-currency and variable-rate debt movements, including the $32.0 million interest-rate swap liability.
- Track acquisition integration, contingent purchase-price liabilities, warranty claims and the disclosed ventilation-unit litigation.
- Confirm liquidity assumptions, including $411.9 million of cash, $477.3 million of available revolving capacity and continued covenant compliance.