Regal Beloit Corporation — Fiscal 2012 Form 10-K
Business context and reporting period
Regal Beloit Corporation manufactured electric motors and controls, generators and controls, and mechanical motion-control products through its Electrical and Mechanical segments. The filing covers the 52-week fiscal year ended December 29, 2012, compared primarily with the 52-week fiscal year ended December 31, 2011. The company later changed its name to Regal Rexnord Corporation.
Fiscal 2012 included four acquisitions: Milwaukee Gear Company for $80.3 million and three smaller Electrical businesses acquired for aggregate consideration of approximately $8.7 million. The company launched 61 new products and employed approximately 23,800 people worldwide.
Key financial metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Net sales | $3,166.9 million | $2,808.3 million | +12.8% |
| Gross profit | $771.0 million | $666.0 million | +15.8% |
| Gross margin | 24.3% | 23.7% | +60 basis points |
| Income from operations | $312.8 million | $255.7 million | +22.3% |
| Operating margin | 9.9% | 9.1% | +80 basis points |
| Net income attributable to Regal Beloit | $195.6 million | $152.3 million | +28.4% |
| Diluted EPS | $4.64 | $3.79 | +22.4% |
| Operating cash flow | $351.7 million | $265.3 million | +32.6% |
Electrical segment sales increased 13.3% to $2,870.2 million, including $537.2 million from recently acquired businesses. Mechanical segment sales increased 7.9% to $296.7 million, including $42.5 million from acquired businesses. High-efficiency product sales rose 22.1% and represented 20.3% of consolidated sales, compared with 16.1% in 2011.
Cash and cash equivalents were $375.3 million at year-end, compared with $142.6 million in 2011. Working capital increased to $1,006.0 million from $766.6 million, and the current ratio improved to 2.9:1 from 2.5:1. Capital expenditures were $91.0 million, while business acquisitions used $110.4 million.
Total debt was $818.5 million at year-end, compared with $919.2 million in 2011. Long-term debt was $754.7 million, and the company had $472.0 million of available borrowings under its $500.0 million revolving credit facility, net of standby letters of credit. The company was in compliance with all debt covenants; debt-to-EBITDA was approximately 1.8:1 versus a maximum of 3.75:1, and interest coverage was approximately 10.5:1 versus a minimum of 3.0:1.
Fourth-quarter information
| Metric | Q4 2012 | Q4 2011 |
|---|---|---|
| Net sales | $715.6 million | $727.0 million |
| Gross profit | $160.7 million | $170.9 million |
| Income from operations | $47.1 million | $58.6 million |
| Net income attributable to Regal Beloit | $29.9 million | $33.5 million |
| Diluted EPS | $0.70 | $0.80 |
Although full-year results improved, fourth-quarter sales, operating income, attributable net income and diluted EPS declined versus the prior-year quarter.
Material changes versus the prior comparable period
- Reported sales growth was primarily acquisition-driven: recently acquired businesses contributed $579.7 million of incremental fiscal 2012 sales. Excluding acquisitions, sales declined because of lower volume and mix, particularly in HVAC, commercial and industrial markets.
- Management reported softer HVAC demand in the first half of 2012 and slowing commercial and industrial demand in the second half. Price increases contributed approximately 0.6%, while volume and mix reduced sales by approximately 7.9% and foreign currency translation reduced sales by approximately 1.2%.
- Margins improved despite $6.9 million of Electrical segment restructuring charges and $0.7 million of Mechanical purchase-accounting adjustments. Fiscal 2011 had included $25.8 million of EPC inventory purchase-accounting adjustments and $12.6 million of incremental warranty expense related to a production flaw.
- Net interest expense increased to $42.9 million from $29.4 million because of the full-year effect of borrowings used to finance the 2011 EPC acquisition.
- The effective tax rate declined to 25.8% from 30.2%, primarily due to completion of tax integration related to the EPC acquisition and foreign tax-rate differences.
- The company sold 3.2 million shares for $202.9 million, strengthening cash balances and equity. Dividends declared increased to $0.75 per share from $0.71.
Guidance, outlook, risks and unusual items
Management did not provide formal earnings or revenue guidance in the filing. It expected the near-term operating environment to remain challenging because of global economic uncertainty and anticipated fiscal 2013 capital expenditures of approximately $100.0 million, funded with operating cash and potential revolver borrowings.
Management identified competition, commodity prices, customer concentration in HVAC, supply disruptions, foreign currency and interest-rate exposure, acquisition integration, product liability, litigation, restructuring execution, international operations, taxes, information technology implementation and goodwill impairment as material risks.
Goodwill was $1,151.0 million and intangible assets were $293.2 million at year-end. The 2012 impairment tests did not result in an impairment charge, but three reporting units holding $94.8 million of goodwill had estimated fair values less than 10% above carrying values.
The company disclosed claims involving sub-fractional motors manufactured through 2004 that were incorporated into third-party ventilation units alleged to have caused fires. Management did not believe the claims were currently material, but stated that outcomes, remedial actions and costs could not be predicted and could be significant. Total contractual obligations were $1,291.4 million, including $1,010.3 million of debt obligations including estimated interest.
On February 8, 2013, after the fiscal year-end, the company announced completion of its acquisition of the RAM motor business from Schneider Electric. The business was expected to be reported in the Electrical segment.
Facts investors should verify
- Separate organic performance from acquisition-related growth, particularly the full-year impact of EPC and the 2012 Milwaukee Gear acquisition.
- Monitor HVAC, commercial and industrial demand trends and whether volume declines persist despite pricing actions.
- Review debt maturities, including the $63.8 million current maturity in 2013, the $150.2 million maturity in 2014 and the $501.0 million due thereafter.
- Assess goodwill and intangible-asset sensitivity, especially the reporting units with limited valuation headroom.
- Track the ventilation-motor litigation, warranty claims and any product recall or remediation exposure.
- Evaluate commodity, currency and interest-rate hedges, including the $35.7 million long-term hedging obligation and $17.4 million net-of-tax hedging loss in accumulated other comprehensive income.
- Confirm fiscal 2013 results against the stated approximately $100.0 million capital-spending expectation and the company’s ability to maintain covenant compliance and liquidity.