Regal Beloit Corporation Form 10-Q Summary
Reporting period: Quarter and nine months ended September 27, 2014, compared with the periods ended September 28, 2013. The filing identifies the registrant as Regal Beloit Corporation; the request metadata refers to Regal Rexnord Corp.
Business Context and Reporting Period
The company operates through Electrical and Mechanical segments serving electric motor, drives and controls, power generation, HVAC, and mechanical motion-control markets. Results include the acquisitions of Hy-Bon and Benshaw, acquired in February and June 2014, respectively. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
| Metric | Three months ended September 27, 2014 | Three months ended September 28, 2013 | Nine months ended September 27, 2014 | Nine months ended September 28, 2013 |
|---|---|---|---|---|
| Net sales | $829.8 million | $768.2 million | $2,481.4 million | $2,368.4 million |
| Gross profit | $203.8 million | $196.5 million | $609.2 million | $605.2 million |
| Gross margin | 24.6% | 25.6% | 24.6% | 25.6% |
| Income from operations | $74.7 million | $78.8 million | $232.1 million | $235.8 million |
| Operating margin | 9.0% | 10.3% | 9.4% | 10.0% |
| Net income attributable to Regal Beloit | $47.5 million | $52.6 million | $147.5 million | $153.2 million |
| Diluted EPS | $1.05 | $1.16 | $3.25 | $3.38 |
- Third-quarter sales increased 8.0%; nine-month sales increased 4.8%. Recently acquired businesses contributed $42.6 million of third-quarter sales and $97.8 million of nine-month sales.
- Third-quarter net income attributable to the company declined 9.7%, and nine-month net income declined 3.7%. Higher tax rates, lower gross margins, restructuring costs, acquisition-related costs, and a $1.9 million loss on a joint-venture sale affected results.
- Operating cash flow was $227.1 million for the nine months, compared with $238.5 million in the prior-year period. Capital expenditures were $60.5 million, and acquisitions used $128.2 million.
- Cash and cash equivalents were $327.3 million at September 27, 2014, compared with $466.0 million at December 28, 2013. Working capital was $1,126.1 million and the current ratio was 2.9:1.
- Total debt was $676.9 million, including $600.0 million of senior notes and $60.0 million outstanding under the revolving facility. Available borrowing capacity was $416.2 million after outstanding borrowings and letters of credit. The company was in compliance with its debt covenants.
- Cash dividends declared were $0.22 per share in the third quarter and $0.64 per share for the nine months. The company repurchased 500,000 shares during the quarter for $35.0 million.
Material Changes Versus the Prior Comparable Period
- Organic sales increased 2.5% in the third quarter and 0.6% for the nine months, excluding recently acquired businesses. Volume and mix improved, while pricing was modestly negative.
- Residential HVAC demand improved, including a fourth consecutive quarter of growth, while commercial and industrial demand remained weak.
- Gross margin declined by 100 basis points in both the quarter and nine-month period, primarily reflecting restructuring expenses, purchase-accounting adjustments, and weaker segment profitability.
- Operating margin declined 130 basis points in the third quarter and 60 basis points for the nine months.
- The effective tax rate increased to 27.1% from 21.6% in the third quarter and to 26.6% from 23.3% for the nine months, partly because of favorable prior-year tax adjustments that did not recur and a higher Mexican tax rate.
- Debt composition changed after the August 2014 maturity of $150.0 million of notes; repayment was funded with cash and revolving-credit borrowings.
- The company recorded a $1.0 million goodwill impairment during the nine months and a $1.9 million loss on the sale of its Jinling joint venture.
Guidance, Outlook, Risks, and Unusual Items
- No specific quantitative earnings or revenue guidance is provided in the filing. Management expects slow economic growth to continue pressuring organic sales in commercial and industrial markets.
- Current restructuring activities are expected to conclude by the end of 2015, with approximately $7.3 million of future charges expected, including $3.3 million of employee termination costs and $4.0 million of facility-related and other costs.
- Venezuela is a significant risk. The company had $26.5 million of Venezuelan trade receivables, approximately 5% of gross trade receivables, and reported collection delays. A hypothetical remeasurement at the SICAD1 or SICAD2 exchange rates would have produced estimated charges of $5.1 million or $9.3 million, respectively.
- Other principal risks include commodity prices, foreign exchange, competition, customer concentration, supplier disruptions, acquisition integration, product liability, litigation, goodwill impairment, economic cyclicality, and debt repayment.
- The company uses foreign-currency, commodity, and interest-rate hedges. A $100.0 million interest-rate swap had a fair-value liability of $12.6 million at period-end.
- Management stated that existing cash, operating cash flow, committed credit lines, and expected capital-market access should fund U.S. operating and capital needs for at least the next twelve months. However, $323.9 million of cash was held by foreign subsidiaries and could be subject to repatriation taxes.
Important Facts for Investors to Verify
- Whether sales growth from Hy-Bon and Benshaw translates into sustainable organic growth and improved margins.
- The causes and duration of the 100-basis-point gross-margin decline and the expected benefits and remaining costs of restructuring.
- Venezuelan receivable collections, currency access, and potential devaluation charges.
- Debt maturities, revolving-facility utilization, covenant compliance, and refinancing needs through 2016 and beyond.
- The effect of higher tax rates, purchase-accounting amortization, goodwill impairment risk, and foreign-exchange losses on future EPS.
- Whether weaker commercial and industrial demand, commodity costs, and competitive pricing continue to pressure operating margins.