Regal Beloit Corporation — Form 10-Q Summary
Business Context and Reporting Period
Regal Beloit Corporation, now associated with Regal Rexnord, manufactures electric motors, electrical motion controls, power generation products and power transmission products. The company reports three segments: Commercial and Industrial Systems, Climate Solutions, and Power Transmission Solutions. This unaudited filing covers the three and six months ended June 30, 2018, compared with July 1, 2017.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Net sales | $959.7 million | $869.2 million | $1,838.5 million | $1,682.7 million |
| Gross profit | $247.4 million | $222.8 million | $482.3 million | $438.3 million |
| Gross margin | 25.8% | 25.6% | 26.2% | 26.0% |
| Income from operations | $99.6 million | $83.2 million | $187.8 million | $158.2 million |
| Operating margin | 10.4% | 9.6% | 10.2% | 9.4% |
| Net income attributable to Regal Beloit | $65.9 million | $53.0 million | $124.3 million | $99.3 million |
| Diluted EPS | $1.50 | $1.18 | $2.81 | $2.20 |
| Operating cash flow | Not separately provided | Not separately provided | $144.3 million | $148.9 million |
- Q2 sales increased 10.4%; six-month sales increased 9.3%.
- Q2 gross profit increased 11.0%, and operating income increased 19.7%.
- Q2 diluted EPS increased 27.1%; six-month diluted EPS increased 27.7%.
- The effective tax rate was 21.4% in Q2 and 21.2% for the six months, versus 21.6% and 22.0%, respectively, in the comparable periods.
- Cash and cash equivalents were $175.6 million at June 30, 2018, compared with $139.6 million at December 30, 2017. Working capital was $956.2 million, and the current ratio was 2.2:1.
- Total debt was $1,335.6 million, including $100.5 million of current maturities, compared with $1,141.1 million at December 30, 2017. The company had $286.1 million of available revolving credit capacity and was in compliance with its debt covenants.
- Capital expenditures were $40.5 million, and acquisition spending was $161.5 million during the first six months.
- Dividends declared were $0.28 per share in Q2 and $0.54 per share for the first six months. The company repurchased $71.1 million of common stock during the first six months.
Material Changes Versus the Prior Comparable Period
- Organic sales growth was 5.7% in Q2 and 5.8% for the first six months. Foreign currency translation contributed 1.3% and 1.7%, respectively.
- The acquisition of Nicotra Gebhardt on April 10, 2018 contributed 3.5% of Q2 sales growth and 1.8% of six-month sales growth. The acquisition cost $161.5 million in cash and added $67.6 million of provisional goodwill.
- Q2 gross margin improved by 20 basis points, while six-month gross margin improved by 20 basis points. Management cited higher volume, price realization, productivity gains and lower restructuring costs, partly offset by commodity inflation and purchase accounting charges on acquired inventory.
- Operating expenses declined as a percentage of sales to 15.4% in Q2 from 16.1% and to 16.0% for the six months from 16.6%.
- Operating cash flow declined $4.6 million year over year despite higher earnings, primarily because of greater investment in working capital.
- Investing cash outflows increased substantially because of the Nicotra Gebhardt acquisition and higher capital expenditures. Financing activities provided $96.4 million, principally reflecting net debt borrowings of $193.3 million, partly offset by share repurchases and dividends.
- Accumulated other comprehensive loss increased to $215.6 million from $164.0 million at year-end, primarily reflecting foreign currency translation losses. Comprehensive income attributable to Regal Beloit was $77.3 million for the first six months, compared with $207.0 million in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management stated that order trends remained positive and continued to expect low-single-digit organic sales growth for fiscal 2018.
- On July 31, 2018, a customer notified the company that it would wind down operations over the following 60 days. The affected Residential Hermetic business generated $31.9 million of sales in the first six months. The company accelerated its planned exit and estimated up to $35.0 million of fiscal 2018 impairment and exit-related costs, including approximately $3.5 million of cash costs.
- Current restructuring activities are expected to continue, with approximately $3.9 million of additional charges anticipated. Restructuring costs were $1.5 million in Q2 and $3.2 million for the first six months, versus $7.7 million and $10.9 million, respectively, in the prior-year periods.
- The company repaid the $100.0 million of senior notes due in July 2018 using existing cash and operating cash flow. On July 24, 2018, the board replaced the prior share repurchase authorization with a new authorization to purchase up to $250.0 million of shares.
- The Tax Cuts and Jobs Act resulted in a provisional $40.0 million transition-tax liability, payable over eight years. The company was still evaluating proposed Treasury rules and the accounting treatment of GILTI.
- Principal risks include debt and interest-rate exposure, commodity and foreign-currency volatility, acquisition integration, restructuring execution, cyclical capital-goods demand, customer and supplier concentration, product liability and warranty claims, intellectual-property matters, information-technology breaches, impairment of goodwill or intangible assets, and global economic or trade conditions.
- A subsidiary faces numerous claims relating to historical sub-fractional motors alleged to have contributed to fires in third-party ventilation units. An estimated liability has been recorded, but the company stated that potential remedial actions and costs could be significant.
- The company uses commodity, currency and interest-rate derivatives as cash-flow hedges. At June 30, 2018, variable-rate debt was $835.0 million and fixed-rate debt was $504.8 million, excluding the effect of swaps.
Facts Investors Should Verify
- Whether the Residential Hermetic exit produces the estimated impairment and exit costs of up to $35.0 million and how quickly the related customer loss affects revenue.
- The final purchase accounting for Nicotra Gebhardt, including acquired intangible assets, goodwill and any subsequent valuation adjustments.
- Debt reduction plans, refinancing or repayment of the revolving facility, interest-rate exposure and compliance with financial covenants.
- Progress toward the low-single-digit organic sales outlook and the sustainability of price realization amid commodity inflation.
- Working-capital conversion, particularly the increase in receivables and inventories, and whether operating cash flow improves.
- Developments in the historical product-liability claims, restructuring programs, tax-law accounting and potential additional costs.