Regal Beloit Corporation (now associated with Regal Rexnord) — Form 10-Q Summary
Business Context and Reporting Period
The filing is Regal Beloit Corporation’s unaudited Form 10-Q for the quarter and six months ended June 28, 2014, compared with June 29, 2013. The company operated through Electrical and Mechanical segments, serving electric motor, drives and controls, power generation, and mechanical motion-control markets.
The filing identifies the registrant as Regal Beloit Corporation, not Regal Rexnord Corporation. The company reported 45.2 million shares outstanding as of August 4, 2014.
Key Financial Metrics
| Metric | Three Months Ended June 28, 2014 | Three Months Ended June 29, 2013 | Six Months Ended June 28, 2014 | Six Months Ended June 29, 2013 |
|---|---|---|---|---|
| Net sales | $850.4 million | $822.0 million | $1,651.6 million | $1,600.2 million |
| Gross profit | $211.0 million | $209.2 million | $405.4 million | $408.7 million |
| Gross margin | 24.8% | 25.5% | 24.5% | 25.5% |
| Income from operations | $87.7 million | $81.1 million | $157.4 million | $157.0 million |
| Operating margin | 10.3% | 9.9% | 9.5% | 9.8% |
| Net income attributable to Regal Beloit | $56.2 million | $51.1 million | $100.0 million | $100.6 million |
| Diluted EPS | $1.24 | $1.13 | $2.20 | $2.22 |
Six-month operating cash flow was $145.3 million, compared with $157.3 million in the prior-year period. Capital expenditures were $42.9 million, and cash used for acquisitions was $77.6 million, primarily for the Hy-Bon acquisition. Ending cash and cash equivalents were $445.3 million, compared with $466.0 million at December 28, 2013.
Total debt was approximately $767.0 million, including $750.0 million of senior notes and $17.0 million of other debt. The company had no borrowings under its $500.0 million revolving credit facility, $23.7 million of standby letters of credit, and $476.3 million of available borrowing capacity. The current ratio was 2.4:1, and working capital was $1.08 billion.
Dividends declared were $0.22 per share in the quarter and $0.42 per share for the six-month period, compared with $0.20 and $0.39, respectively, in the prior-year periods.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 3.5%, while six-month sales increased 3.2%. Growth included $31.8 million of second-quarter and $55.2 million of six-month incremental sales from recently acquired businesses.
- Excluding acquisitions, second-quarter sales declined 0.4% and six-month sales declined 0.2%, reflecting price reductions and unfavorable foreign-currency translation, partly offset by volume and mix.
- Electrical segment sales increased 3.7% in the quarter and 3.6% year to date. Mechanical segment sales increased 1.2% in the quarter but declined 1.5% year to date.
- Gross margin declined by 70 basis points in the quarter and 100 basis points year to date. The 2014 periods included restructuring costs and purchase-accounting adjustments; the 2013 periods included Venezuelan currency-related inventory costs and other items.
- Operating margin improved in the quarter to 10.3% from 9.9%, but declined year to date to 9.5% from 9.8%. Mechanical segment operating margin weakened, primarily due to lower natural-gas-fracturing demand.
- Quarterly attributable net income rose 10.0%, while six-month attributable net income declined 0.6%. The higher quarterly EPS benefited from improved operating income and lower net interest expense; the year-to-date comparison was affected by the higher tax rate and weaker gross margin.
- Cash from operations declined $11.9 million year to date, primarily because of lower net income and increased working-capital requirements. Investing cash usage increased substantially because of the Hy-Bon acquisition.
- On February 7, 2014, the company acquired Hy-Bon Engineering for $77.6 million, adding vapor-recovery products for oil and gas applications. On June 30, 2014, after quarter-end, it acquired Benshaw for approximately $50.0 million; Benshaw had estimated annual revenue of approximately $60.0 million.
Guidance, Outlook, Risks, and Unusual Items
- Management expected slow growth in U.S. commercial and industrial end markets to continue into the third quarter, potentially pressuring organic sales.
- Residential HVAC demand was improving, with the second quarter representing the third consecutive quarter of growth in that product area.
- Restructuring charges were $3.6 million in the quarter and $7.8 million year to date. Activities were expected to conclude by the end of 2015, with approximately $9.1 million of additional aggregate charges anticipated.
- A $1.0 million non-cash goodwill impairment was recorded in the Electrical segment following the closure of a technology-related facility.
- The company expected to repay $150.0 million of senior notes maturing in August 2014 using existing cash and revolving-credit borrowings. Management stated that it expected to remain in compliance with debt covenants.
- Venezuelan currency restrictions created a material exposure. The company held approximately $11.0 million of net monetary assets denominated in Bolivars and continued using the official exchange rate. Applying the SICAD1 or SICAD2 rates at June 28, 2014 would have produced estimated non-recurring charges of $4.3 million or $9.3 million, respectively.
- Key ongoing risks included commodity prices, foreign exchange, competition, dependence on significant customers and suppliers, acquisition integration, debt repayment, cyclical capital-goods demand, product liability, litigation, intellectual property, goodwill impairment, and foreign operating conditions.
- The filing states that there were no material changes to previously disclosed legal proceedings or risk factors. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Confirm the issuer identity: this filing is for Regal Beloit Corporation and predates the Regal Rexnord name.
- Assess whether organic sales weakness in commercial, industrial, and international markets is offset by acquisitions and residential HVAC growth.
- Monitor gross-margin pressure from restructuring, purchase accounting, pricing, commodities, and foreign exchange.
- Verify the August 2014 repayment or refinancing of the $150.0 million senior-note maturity and the resulting leverage and liquidity.
- Evaluate the integration, valuation, and subsequent financial contribution of Hy-Bon and the post-quarter-end Benshaw acquisition.
- Track the Venezuelan exchange-rate situation and any resulting devaluation charge or reduction in reported earnings.
- Review the approximately $9.1 million of expected future restructuring charges and the $1.0 million goodwill impairment for indications of additional operational or asset-quality issues.