Business Context and Reporting Period
Regal Beloit Corporation, the registrant identified in the filing, manufactures electric motors, electrical motion controls, power-generation equipment and power-transmission products. Effective December 28, 2019, the Company reported four operating segments: Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions.
This Form 10-K covers the 52-week fiscal year ended December 28, 2019. The filing also provides unaudited fourth-quarter information for the quarter ended December 28, 2019. The filing date was February 26, 2020.
Financial Performance and Key Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $3,238.0 million | $3,645.6 million | Down 11.2% |
| Gross profit | $860.7 million | $964.6 million | Down 10.8% |
| Gross margin | 26.6% | 26.5% | Up 0.1 percentage points |
| Income from operations | $351.1 million | $347.0 million | Up 1.2% |
| Operating margin | 10.8% | 9.5% | Up 1.3 percentage points |
| Net income attributable to Regal Beloit | $238.9 million | $231.2 million | Up 3.3% |
| Diluted EPS | $5.66 | $5.26 | Up 7.6% |
| Cash flow from operations | $408.5 million | $362.7 million | Up $45.8 million |
| Capital expenditures | $92.4 million | $77.6 million | Up $14.8 million |
Fiscal 2019 net income margin was approximately 7.5%, compared with approximately 6.5% in fiscal 2018. Interest expense was $53.0 million, income taxes were $61.2 million, and the effective tax rate was 20.1%, compared with 19.3% in the prior year.
Fourth-quarter fiscal 2019 net sales were $738.2 million, income from operations was $61.7 million, net income attributable to Regal Beloit was $36.7 million, and diluted EPS was $0.89. Fourth-quarter 2018 values were $881.7 million, $89.8 million, $55.6 million and $1.28, respectively.
Segment Results
| Segment | 2019 Sales | Sales Change | 2019 Operating Margin |
|---|---|---|---|
| Commercial Systems | $905.3 million | Down 18.5% | 11.4% |
| Industrial Systems | $575.4 million | Down 14.3% | (1.6)% |
| Climate Solutions | $968.5 million | Down 5.5% | 16.9% |
| Power Transmission Solutions | $788.8 million | Down 6.0% | 11.8% |
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $331.4 million at year-end, compared with $248.6 million in 2018. The filing states that the cash was held by foreign subsidiaries.
- Working capital was $1,047.2 million, compared with $1,134.2 million; the current ratio improved to 2.9:1 from 2.7:1.
- Cash flow from investing activities was $74.3 million provided, including $157.9 million of proceeds from business divestitures. Capital expenditures were $92.4 million.
- Cash flow from financing activities used $397.4 million, including $171.0 million of net debt repayments, $165.1 million of share repurchases and $48.9 million of dividends.
- Total debt was $1,137.5 million, down from $1,307.1 million. Debt consisted primarily of a $720.0 million term facility, $400.0 million of senior notes and $17.7 million drawn under the revolving facility.
- The Company had $481.9 million of available revolving-credit capacity and was in compliance with its debt covenants at year-end.
- The Company expects approximately $75.0 million of fiscal 2020 capital expenditures, funded with operating cash flow.
Material Changes Versus the Prior Comparable Period
- Sales declined because of negative organic growth of 5.7%, unfavorable foreign-currency translation of 1.1% and a 5.3% negative impact from businesses divested or exited, partially offset by 0.9% growth from the 2018 Nicotra Gebhardt acquisition.
- Demand weakened in pool pumps, general industry, power generation, oil and gas, HVAC OEM inventory and industrial distribution. Trade uncertainty and the Company’s 80/20 account-pruning initiatives also reduced sales.
- Despite lower revenue, operating income and EPS increased because of lower operating expenses, productivity and simplification programs, selective pricing, favorable mix and divestiture gains.
- Fiscal 2019 included a $44.7 million net gain on business sales: a $41.2 million gain on Regal Drive Technologies, a $6.0 million gain on CapCom, offset by losses on Vapor Recovery and Velvet Drive.
- The Company recorded $10.0 million of asset impairments in 2019, compared with $18.2 million of goodwill and other asset impairments in 2018.
- Restructuring costs increased to $21.6 million from $7.7 million. The Company expects approximately $27.2 million of additional charges related to announced restructuring projects.
- The Company adopted the new lease standard using the modified retrospective method, recording approximately $93.0 million of right-of-use assets and lease liabilities at adoption. The filing states that the adoption did not materially affect net income or cash flow.
Guidance, Outlook, Risks and Unusual Items
Management forecast fiscal 2020 low- to mid-single-digit organic sales growth, improved operating margin through 80/20 initiatives, and positive contribution from products addressing new energy-efficiency regulations. Diluted EPS guidance was $5.35 to $5.75, based on a 21% effective tax rate.
Key risks include cyclical and potentially prolonged weakness in HVAC, power generation, oil and gas and industrial markets; commodity-price, foreign-currency and interest-rate volatility; global manufacturing and supply-chain disruptions; customer concentration; restructuring execution; acquisition integration; debt service and covenant compliance; LIBOR replacement; cybersecurity; product liability and warranty claims; and goodwill or indefinite-lived intangible-asset impairment.
The filing specifically identifies unresolved claims involving motors manufactured primarily through 2004 that were incorporated into third-party ventilation units alleged to have caused fires. The Company has recorded an estimated liability for incurred claims but cannot predict potential CPSC actions or the ultimate cost, which could be significant. The filing also notes a coronavirus outbreak in China and other jurisdictions as of early 2020 and states that the potential operational and market impact was uncertain.
Goodwill was $1,501.3 million and the indefinite-lived Power Transmission Solutions trade name was $121.6 million. Several reporting units and the trade name had fair values less than 10% above carrying values, making future impairment sensitive to changes in forecasts, discount rates and market conditions.
Important Facts for Investors to Verify
- Confirm the filing entity and corporate name: the submitted filing is for Regal Beloit Corporation, not Regal Rexnord Corporation.
- Assess whether fiscal 2020 sales and margin guidance remained achievable given the disclosed early-2020 coronavirus uncertainty and cyclical end-market weakness.
- Review the sustainability of earnings improvement after excluding the $44.7 million of divestiture gains and considering $21.6 million of restructuring costs.
- Monitor Industrial Systems, which reported a fiscal 2019 operating loss and was affected by power-generation project delays, oil and gas weakness and trade uncertainty.
- Evaluate debt maturities, including approximately $230.5 million due in 2021 and $840.7 million due in 2023, as well as floating-rate exposure and LIBOR transition risk.
- Review sensitivity of the $1.5 billion goodwill balance and $121.6 million trade name to changes in operating forecasts, discount rates and terminal or royalty assumptions.
- Track the ventilation-unit fire claims, potential regulatory remedies and product-liability exposure, for which the ultimate outcome and cost were not reasonably predictable.
- Reconcile quarterly results with annual results, noting that the first-quarter 2019 operating income included the $41.2 million Regal Drive Technologies divestiture gain.