Regal Beloit Corporation — Q1 2016 Form 10-Q Summary
Reporting period: Three months ended April 2, 2016, compared with April 4, 2015. The filing identifies the registrant as Regal Beloit Corporation, not Regal Rexnord Corporation. 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.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $818.2 million | $911.7 million | Down 10.3% |
| Gross profit | $217.4 million | $220.9 million | Down 1.6% |
| Gross margin | 26.6% | 24.2% | Up 240 basis points |
| Income from operations | $69.3 million | $63.6 million | Up 9.0% |
| Operating margin | 8.5% | 7.0% | Up 150 basis points |
| Net income attributable to Regal Beloit | $41.6 million | $36.4 million | Up 14.3% |
| Diluted EPS | $0.93 | $0.81 | Up 14.8% |
| Operating cash flow | $58.2 million | $17.5 million | Up $40.7 million |
| Capital expenditures | $14.9 million | $21.2 million | Down $6.3 million |
Interest expense was $15.0 million versus $13.6 million, while the effective tax rate declined to 23.0% from 26.0%, primarily due to the mix of earnings and lower foreign tax rates. Cash dividends declared increased to $0.23 per share from $0.22.
At April 2, 2016, cash and equivalents were $249.1 million, working capital was $1.068 billion and the current ratio was 2.8:1. Total debt was approximately $1.705 billion, including $1.068 billion under the term facility, $600.0 million of senior notes and $36.0 million drawn on the revolving facility. Available revolving capacity was $429.4 million, excluding $34.6 million of standby letters of credit.
Material changes versus the prior comparable period
- Sales declined organically by 12.9%, with a negative foreign-currency effect of 1.3%, partly offset by a 3.9% acquisition contribution. Acquired businesses contributed $35.9 million of sales.
- Commercial and Industrial Systems sales fell 17.3% to $377.6 million, reflecting weakness in oil and gas, Asian industrial markets, North American industrial markets and power generation.
- Climate Solutions sales fell 14.5% to $239.8 million, driven by weaker Middle East HVAC, North American residential HVAC and water-heating demand.
- Power Transmission Solutions sales rose 14.8% to $200.8 million, including a $36.0 million acquisition benefit. Its operating margin improved to 11.5% from negative 1.8% as prior-year PTS inventory purchase-accounting charges and transaction costs did not recur.
- Gross margin improved because Q1 2015 included $13.5 million of PTS inventory step-up expense. Q1 2015 also included $9.2 million of acquisition-related transaction costs.
- Operating cash flow improved primarily from lower working-capital investment and increased PTS profitability. Investing cash use declined sharply because Q1 2015 included the $1.393 billion PTS acquisition.
- On January 18, 2016, the company acquired the remaining interest in Elco Group B.V. for $19.6 million, increasing ownership from 55% to 100%.
Outlook, risks and unusual items
Management’s 2016 outlook assumes that weak demand in many end markets experienced during the second half of 2015 will continue throughout fiscal 2016, pressuring sales and earnings. No quantitative earnings or revenue guidance is provided in the filing.
- Restructuring activities are expected to conclude by the end of Q1 2017. The company expects approximately $14.3 million of future charges, comprising $5.2 million of employee termination costs and $9.1 million of facility-related and other costs.
- Restructuring and restructuring-related costs were $1.4 million in Q1 2016 versus $1.2 million in Q1 2015.
- On April 28, 2016, the company agreed to sell its Mastergear Worldwide business for $25.0 million; closing was expected in Q2 2016.
- Key risks include prolonged oil and gas capital-spending weakness, cyclical capital-goods demand, commodity prices, currency movements, customer and supplier concentration, integration of acquired businesses, elevated debt, warranty and product-liability claims, litigation, impairment of goodwill or intangible assets, and execution of restructuring plans.
- The company reported compliance with all debt covenants as of April 2, 2016. Most cash was held by foreign subsidiaries; $239.6 million of the $249.1 million cash balance was foreign-held and could be subject to repatriation taxes if used domestically.
- Accounting changes included prospective changes to inventory valuation and LIFO pools; management stated these changes had no material first-quarter impact. The company was evaluating forthcoming standards for share-based compensation, revenue recognition and leases.
- The company reported numerous claims involving sub-fractional motors manufactured by an acquired subsidiary but stated that the claims were not expected to have a material effect on the financial statements.
Investor verification points
- Verify the registrant identity and corporate name, since the supplied metadata says Regal Rexnord while the filing is for Regal Beloit Corporation.
- Assess whether continuing organic sales declines, particularly in oil and gas, industrial, HVAC and energy markets, could offset margin and cost-savings improvements.
- Reconcile reported earnings growth with nonrecurring PTS acquisition costs and inventory step-up charges in the prior-year period.
- Monitor debt reduction, floating-rate exposure, covenant headroom and the scheduled amortization of the term facility.
- Evaluate execution of the restructuring program, including the remaining $14.3 million of expected charges and the timing of facility closures.
- Review the impact of the Mastergear sale, future acquisition integration, foreign currency exposure and derivative losses recorded in accumulated other comprehensive income.