Regal Beloit Corporation (now Regal Rexnord) — Q2 2017 Form 10-Q
Business context and reporting period
The filing covers the quarter and six months ended July 1, 2017, with comparative periods ended July 2, 2016. The company manufactures electric motors, controls, power-generation products, climate solutions, and power-transmission products through Commercial and Industrial Systems, Climate Solutions, and Power Transmission Solutions.
Key financial metrics
| Metric | Three months ended July 1, 2017 | Three months ended July 2, 2016 | Six months ended July 1, 2017 | Six months ended July 2, 2016 |
|---|---|---|---|---|
| Net sales | $869.2 million | $838.6 million | $1,682.7 million | $1,656.8 million |
| Gross profit | $223.0 million | $222.9 million | $438.6 million | $440.3 million |
| Gross margin | 25.7% | 26.6% | 26.1% | 26.6% |
| Income from operations | $83.0 million | $91.4 million | $157.8 million | $160.7 million |
| Operating margin | 9.5% | 10.9% | 9.4% | 9.7% |
| Net income attributable to Regal Beloit | $53.0 million | $56.6 million | $99.3 million | $98.2 million |
| Diluted EPS | $1.18 | $1.26 | $2.20 | $2.19 |
Six-month operating cash flow was $148.9 million, compared with $176.1 million in the prior-year period. Capital expenditures were $33.7 million, dividends paid were $21.4 million, and share repurchases used $21.0 million. Cash and equivalents were $243.7 million at July 1, 2017, compared with $284.5 million at December 31, 2016.
Total debt was $1,300.2 million, including $100.7 million of current maturities, versus $1,411.5 million at December 31, 2016. The company had $451.8 million of available revolving-credit capacity, in addition to $15.9 million drawn and $32.3 million of outstanding letters of credit. Working capital was $910.3 million and the current ratio was 2.2 to 1.
Material changes versus the prior comparable period
- Second-quarter sales increased 3.6%, consisting of 4.8% organic growth, a 0.7% unfavorable foreign-currency effect, and a 0.5% unfavorable effect from the Mastergear divestiture. Six-month sales increased 1.6%.
- Second-quarter gross profit was essentially flat, while gross margin declined 90 basis points because of restructuring charges, commodity inflation, and production challenges following plant consolidations.
- Second-quarter operating income decreased 9.2%, and diluted EPS declined from $1.26 to $1.18. The prior-year period benefited from an $11.6 million gain on the sale of Mastergear.
- Six-month net income attributable to the company increased modestly despite lower operating income, primarily reflecting a lower effective tax rate of 22.0% versus 24.1%.
- Climate Solutions delivered the strongest operating improvement, with six-month sales up 4.8% and operating margin increasing to 13.8% from 12.3%. Power Transmission Solutions six-month sales declined 3.7% and operating margin fell to 10.6% from 13.6%.
- Restructuring and related costs increased to $10.9 million for the six months, versus $3.1 million in the prior-year period. The company expects approximately $8.7 million of additional charges, with activities continuing into 2018.
Guidance, outlook, risks, and unusual items
Management stated that order trends remained positive and continued to expect low-single-digit organic sales growth for the full year. Management believes operating cash flow and available revolver capacity will fund operations, capital expenditures, and other foreseeable needs.
- The $100.0 million floating-rate note maturing August 23, 2017 was expected to be repaid using existing cash and operating cash flow.
- Substantially all cash held outside the United States was at foreign subsidiaries; $239.9 million of the $243.7 million cash balance was held abroad. Repatriation could create tax costs.
- Key risks include commodity-price inflation, foreign-exchange movements, floating-rate debt, cyclical capital-goods demand, customer concentration, supplier disruptions, acquisition integration, restructuring execution, product liability, warranty claims, litigation, and goodwill or intangible-asset impairment.
- A subsidiary faces numerous claims involving sub-fractional motors allegedly associated with ventilation-unit fires. The company has recorded an estimated liability but stated that potential costs and regulatory actions cannot be reasonably predicted and could be significant.
- The company used currency, commodity, and interest-rate derivatives for hedging and stated that it did not use them for speculative purposes. It was in compliance with all debt covenants at July 1, 2017.
- The company adopted the stock-compensation accounting update effective January 1, 2017 and was evaluating the future effects of new revenue-recognition, lease, pension-presentation, and stock-compensation guidance.
Investor verification items
- Verify the sustainability of low-single-digit organic growth, particularly in Power Transmission Solutions and oil-and-gas-related markets.
- Assess whether restructuring, plant-consolidation, and production-transition costs remain elevated and whether the projected additional $8.7 million is sufficient.
- Review debt maturities, floating-rate exposure, covenant headroom, and the company’s ability to refinance or repay the August 2017 note.
- Monitor working-capital growth, especially the $82.3 million increase in trade receivables from year-end 2016, and the decline in operating cash flow.
- Evaluate exposure to commodity inflation, foreign-currency movements, product-liability claims, and potential CPSC or other remedial actions.
- Reconcile the filing’s historical name, Regal Beloit Corporation, with the requested company name, Regal Rexnord Corp., and confirm the applicable successor-company reporting history.