Business Context and Reporting Period
The filing is Regal Beloit Corporation’s Form 10-K for the 52-week fiscal year ended December 28, 2013. The request identifies Regal Rexnord Corp.; however, the filing names the registrant as Regal Beloit Corporation, which is the predecessor name associated with the 2013 filing.
The company manufactures electric motors, controls, generators, drives, capacitors, gearboxes, transmissions, valve actuators and other mechanical motion-control products. It reports two segments: Electrical and Mechanical.
Key Financial Metrics
| Metric | Fiscal 2013 | Fiscal 2012 |
|---|---|---|
| Net sales | $3,095.7 million | $3,166.9 million |
| Gross profit | $783.2 million | $771.0 million |
| Gross margin | 25.3% | 24.3% |
| Income from operations | $208.0 million | $312.8 million |
| Operating margin | 6.7% | 9.9% |
| Net income attributable to Regal Beloit | $120.0 million | $195.6 million |
| Diluted EPS | $2.64 | $4.64 |
| Operating cash flow | $305.0 million | $351.7 million |
| Capital expenditures | $82.7 million | $91.0 million |
| Total debt | $767.4 million | $818.5 million |
| Cash and cash equivalents | $466.0 million | $375.3 million |
Fiscal 2013 fourth-quarter net sales were $727.2 million, compared with $715.6 million in the fourth quarter of 2012. Fourth-quarter operating loss was $27.8 million versus operating income of $47.1 million, primarily because of an $81.0 million impairment and related charge. Fourth-quarter net loss attributable to Regal Beloit was $33.2 million, or $(0.74) diluted EPS, versus $29.9 million of net income, or $0.70 diluted EPS, in the prior-year quarter.
Liquidity remained substantial: working capital was $1.025 billion and the current ratio was 2.5:1 at year-end. The company had $476.4 million of available capacity under its $500.0 million revolving credit facility, net of approximately $23.6 million of standby letters of credit.
Material Changes Versus the Prior Comparable Period
- Sales declined 2.2%, reflecting lower volumes and mix, contractual price reductions tied to lower commodity costs, and unfavorable foreign-currency translation. Acquired businesses contributed $30.7 million of incremental sales.
- Electrical segment sales decreased 1.2% to $2.837 billion, while Mechanical segment sales decreased 12.7% to $259.0 million. Mechanical results were affected by weakness in hydraulic fracturing equipment markets.
- Gross margin improved by 100 basis points, primarily from lower costs and segment mix, despite restructuring charges, Venezuelan currency devaluation effects and purchase-accounting adjustments.
- Operating income declined 33.5%, driven mainly by the fourth-quarter $81.0 million non-cash impairment and other charge. The charge included $76.3 million of goodwill impairments and $17.0 million of intangible-asset impairments, partially offset by a $12.3 million gain from reducing contingent consideration.
- Net income attributable to Regal Beloit fell 38.7%; the impairment reduced that measure by approximately $74.7 million after tax.
- Operating cash flow decreased $46.7 million because of increased investment in working capital, particularly inventories. Investing cash use declined as acquisition spending fell to $38.4 million from $110.4 million.
- Total debt decreased $51.1 million. The final $55.0 million term-loan payment was made in June 2013, while $150.0 million of senior notes were scheduled to mature in August 2014.
- The company acquired Cemp, an Italy-based flameproof-motor manufacturer, for $32.0 million, acquired the RAM motor business for $6.0 million, and purchased additional South African joint-venture shares for $1.7 million.
Guidance, Outlook, Risks and Unusual Items
Management expected residential HVAC revenue to decline by up to $20 million over the following two quarters because of customer supplier changes, pricing pressure and consumer preference for standard products. Management expected first-quarter growth in commercial and industrial, China and global power-generation businesses, but continued weakness in India and Australia.
Gross margins were expected to remain pressured by the gap between product pricing and commodity costs, inefficiencies related to plant relocations, and purchase-accounting adjustments affecting recent acquisitions. Fiscal 2014 capital spending was projected at $80 million to $85 million and was expected to be funded with operating cash flow.
- Key operating risks include intense global competition, customer concentration among major OEMs, volatile steel, copper, aluminum and other input costs, supply-chain disruption and foreign-currency movements.
- Acquisition integration, restructuring, ERP implementation, international operations and potential liabilities of acquired businesses could affect earnings and cash flow.
- The company was subject to product-liability and warranty litigation, including claims involving motors manufactured through 2004 and allegedly associated with fires in ventilation units. Management did not believe the claims were likely to be material, but stated that costs could be significant and outcomes were uncertain.
- Goodwill and intangible assets remained significant, at $1.082 billion and $244.2 million, respectively, after the 2013 impairments. Additional impairment risk depends on future sales, margins, cash-flow projections and valuation assumptions.
- The company had $484.1 million of undistributed foreign-subsidiary earnings treated as permanently reinvested; potential U.S. federal, state and foreign withholding taxes of approximately $107.3 million had not been recorded.
Most Important Facts to Verify
- Confirm that the intended issuer is Regal Beloit Corporation rather than Regal Rexnord Corp.; the filing is for Regal Beloit.
- Review the nature, affected reporting units and valuation assumptions underlying the $81.0 million fourth-quarter impairment charge.
- Assess the company’s ability to refinance or repay the $158.4 million of current debt maturities, including the $150.0 million senior-note maturity in August 2014.
- Track HVAC customer volumes, pricing, commodity costs and the expected impact of plant relocations on margins.
- Evaluate working-capital trends, particularly the increase in inventories to $618.7 million and the resulting decline in operating cash flow.
- Review the status and potential exposure of legacy product-liability claims, restructuring activities and acquisition integration.