Regal Beloit Corporation — Q1 2017 Form 10-Q Summary
Business context and reporting period
Regal Beloit Corporation, now known as Regal Rexnord, manufactures electric motors, motion controls, power generation products, climate solutions, and power transmission products. The filing covers the unaudited three months ended April 1, 2017, compared with the three months ended April 2, 2016.
- Operating segments: Commercial and Industrial Systems, Climate Solutions, and Power Transmission Solutions.
- Fiscal year ending: December 30, 2017.
- Shares outstanding at May 8, 2017: 44.8 million.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $813.5 million | $818.2 million | Down 0.6% |
| Gross profit | $215.6 million | $217.4 million | Down 0.8% |
| Gross margin | 26.5% | 26.6% | Down 10 bps |
| Income from operations | $74.8 million | $69.3 million | Up 7.9% |
| Operating margin | 9.2% | 8.5% | Up 70 bps |
| Net income | $47.6 million | $42.7 million | Up 11.5% |
| Net income attributable to Regal | $46.3 million | $41.6 million | Up 11.3% |
| Diluted EPS | $1.02 | $0.93 | Up 9.7% |
| Cash flow from operations | $50.5 million | $58.6 million | Down $8.1 million |
| Capital expenditures | $17.0 million | $14.9 million | Up $2.1 million |
Interest expense was $14.4 million, compared with $15.0 million in the prior-year quarter. The effective tax rate declined to 22.5% from 23.0%, primarily because of the mix of earnings and lower foreign tax rates. The quarterly dividend increased to $0.24 per share from $0.23.
Segment performance and material changes
| Segment | Q1 2017 sales | Year-over-year sales change | Q1 2017 operating margin |
|---|---|---|---|
| Commercial and Industrial Systems | $381.2 million | Up 1.0% | 6.8% |
| Climate Solutions | $247.7 million | Up 3.3% | 12.6% |
| Power Transmission Solutions | $184.6 million | Down 8.1% | 9.6% |
- Consolidated sales reflected 0.7% organic growth, offset by 0.6% unfavorable foreign currency translation and 0.6% unfavorable divestiture impact.
- Commercial and Industrial Systems benefited from growth in Asia and power generation.
- Climate Solutions benefited from North American residential HVAC demand and improved Middle East end-market conditions.
- Power Transmission Solutions was pressured by renewable-energy demand patterns, continuing oil and gas weakness, and the prior divestiture of Mastergear.
- Operating expenses declined $7.3 million, or 80 basis points of sales, primarily because of cost controls and lower amortization and depreciation.
- Restructuring and restructuring-related costs were $3.2 million, compared with $1.4 million in the prior-year quarter. Management expects restructuring activities to continue into 2018 and estimates approximately $10.5 million of additional charges.
Cash, liquidity, debt, and balance-sheet position
- Cash and cash equivalents were $262.3 million at April 1, 2017, down from $284.5 million at December 31, 2016. Approximately $259.6 million was held by foreign subsidiaries.
- Working capital was $901.4 million, compared with $830.4 million at year-end; the current ratio was 2.3:1 versus 2.2:1.
- Total debt was approximately $1.37 billion, consisting principally of a $748.1 million term facility and $600.0 million of senior notes. The noncurrent portion was $1.269 billion.
- The company had $443.0 million of available borrowing capacity under its $500.0 million revolving facility, after $24.8 million of borrowings and $32.2 million of standby letters of credit.
- Debt repayments totaled $43.5 million during the quarter. The company expects to repay the $100.0 million senior note maturing August 23, 2017, using existing cash and operating cash flow.
- The company was in compliance with all debt covenants at April 1, 2017.
- Operating cash flow declined because of greater investment in net working capital. Financing cash outflows were $60.3 million, including debt repayments, dividends, and a $5.3 million contingent consideration payment.
Guidance, outlook, risks, and unusual items
Management stated that orders strengthened throughout the first quarter and expects positive organic sales growth in 2017. It expects volume growth and simplification efforts to improve margins enough to offset continued commodity inflation. No specific full-year revenue or earnings-per-share guidance was provided.
- Key exposures include commodity prices, foreign currency, interest rates, cyclical capital-goods demand, oil and gas spending, customer concentration, competition, supply disruptions, and integration of acquired businesses.
- The company uses commodity, currency, and interest-rate derivatives. At April 1, 2017, foreign-currency forward contracts had aggregate disclosed notional amounts of approximately $706 million, and commodity hedges covered approximately $66 million of copper and aluminum exposures.
- A subsidiary faces claims involving sub-fractional motors used in ventilation units allegedly associated with fires. The company has recorded an estimated liability but cannot predict the outcome, potential government actions, or total costs; some costs could be significant.
- Standard product warranty liabilities were $18.2 million at quarter-end.
- Goodwill was $1.457 billion and intangible assets, net, were $699.5 million. No current-period impairment charge was reported.
- The company adopted ASU 2016-09 regarding share-based payment accounting on January 1, 2017. The filing states that the adoption did not materially affect reported results beyond the described presentation and tax-accounting changes.
- Revenue recognition and lease accounting standards had not yet been adopted; the company was evaluating their future effects.
Important facts for investors to verify
- Whether organic sales growth and order strength continue, particularly in Power Transmission Solutions.
- The pace and total cost of restructuring activities, including the estimated $10.5 million of future charges.
- Cash generation and working-capital levels ahead of the August 2017 $100.0 million debt maturity.
- Commodity inflation, foreign-exchange movements, and the effectiveness of related hedging programs.
- Potential liability and remediation costs associated with the ventilation-unit motor claims.
- Future effects of the revenue recognition and lease accounting standards and the company’s debt covenant headroom.